Solving the Global Iron Ore Shortage
Source: Brian Sylvester of
The Gold Report
If there is one thing UBS Securities' Dieter Hoeppli knows it's
steel. As global head of steel, as well as metals and mining in the
Americas for UBS, he's spent the last 20 years analyzing the steel
business and acting as an advisor on countless mergers and takeover
deals. He regularly travels the world and crunches numbers to
determine what's going to grow and what's not. In this
exclusive, we take you inside the recent Forbes &
Manhattan summit for some of Dieter's candid thoughts on the
shortage of iron ore global steel manufacturers are now facing.
"I am bullish about steel, I think steel has a great future,"
said Dieter Hoeppli, managing director of UBS Securities' steel and
metals group in New York City, during a presentation at the first
annual Forbes & Manhattan Resource Summit in West Palm Beach,
"There is a lot of infrastructure to be built if you go to
places, such as India and Brazil, which I came from this morning,"
he added. "You see a lot of activity taking place; that's going to
run for the next 5 or 10 years and a lot of steel is going be
consumed for that."
Annual global steel production went from 770 million tons (Mt.)
in 1990 to 847 tons in 2000 to roughly 1,367 Mt. in 2010. Steel
production is expected to have a compound annual growth rate of
5.6% in each of the next two years and total production should
reach 1,524 Mt. in 2012.
Moving Away from the U.S.
He noted, however, that biggest change from 1990-2010 is where
steel is manufactured. In 1990, Russia made about 20% of the
world's steel; but by 2010, Russian production accounted for just
8%. European and North American steel production witnessed similar
or even more drastic declines. And most of that production has
shifted to Asia, which now produces about two-thirds of the world's
In 1994, only four of the world's top-40 steel producers were
Chinese companies, whereas six were American. Today, seven are
based in China and just two are left in America.
Dieter said that shift has brought with it the disappearance of
well-known steel companies like Bethlehem Steel and British Steel.
Those names have been replaced by new ones like
Nucor Corporation (
Nippon Steel Corporation (OTC:NISTF; OTC:NISTY)
"These are the new leaders in the industry," Dieter said. "They
are more nimble, further diversified and many of them are backward
integrated into raw material."
Merger and acquisition (M&A) activity in the steel sector
peaked in 2006 with 27 deals valued at nearly $60 billion. The
number of deals picked up pace following that year, with 39 deals
worth roughly $37.3 billion in 2007 and about $20 billion over 32
transactions in 2008. As of Nov. 1, 2010, M&A activity stood at
13 pacts valued at $5.4 billion.
Dieter said the key development in consolidation was the
creation of large steel companies with numerous blast furnaces that
give them greater production flexibility. In the 1990s, many of the
small steel companies had but a single furnace, which meant it had
to be kept running, even at a loss.
India and Brazil Poised for Future Production
Dieter expects future steel production growth to come from
India-a country with a population that rivals China but that only
produces about 60 Mt. of steel annually, versus China's roughly 600
Mt. He cautioned, though, that steel production growth in India
could take some time.
"India is a very difficult place to build new capacity," Dieter
explained; "acquiring land in India and getting permits can take a
very long time.
Pohang Iron and Steel Company (POSCO) (
announced a $10 billion investment in a steel plant [in
India] about seven years ago. It still hasn't broken ground."
He also sees steel production growth coming from Brazil.
"The BRIC countries [Brazil, Russia, India and China] are going
to be the [production] drivers while in more developed markets, we
will still have excess capacity," Dieter said.
From July 2008 until mid-2009, North American steel production
operated at just over 40% of capacity-even below the levels of the
1982 recession when steel production plummeted to about 70 Mt. from
110 Mt. in 1981. Dieter noted that it took North American steel
producers 15 years to return to the 1981 production mark.
It may not take as long this time, however, given that higher
steel prices have boosted North American steel production to 70% of
capacity-an increase of about 30% since 2008.
The price of hot rolled coil is at roughly $550/ton, up from a
low of roughly $210/ton in the late 1990s but down from a peak of
$1,100 in 2007.
Dieter believes steel makers can make money selling steel at
$550/ton but that the rising cost of raw materials has forced steel
producers to get directly involved in mining them to reduce
"If they are not backward integrated, most steel companies are
not making money today," he noted.
Dieter said there are three main sources of raw material-scrap,
iron ore and metallurgical coal.
Scrap prices have skyrocketed from $80/ton in recent years to
around $300/ton now, while iron ore prices went from $35/ton in
2005 to between $150 and $175 per ton today.
He said this has led to a change in iron ore contracts. Deals
used to be done annually but now prices are adjusted quarterly
using a system similar to spot prices-an arrangement that largely
favors the iron ore producers.
"[The new system] is very positive for the iron ore companies,
but more challenging for the steel companies," Dieter said. He
noted that in the near term only two of those raw materials would
be in short supply-metallurgical coal and iron ore.
Metallurgical coal (met coal) is used as a fuel and as a
reducing agent in smelting iron ore in a blast furnace. The supply
deficit in met coal, Dieter said, has led to prices reaching
$210/ton, up sharply from $50 per ton in 2001. What's more, steel
companies are moving upstream into coal mining operations to reduce
or stabilize their costs.
Dieter said there is a similar shortage of iron ore but that by
2015 the deficit would become a surplus after several significant
iron ore projects in Brazil and Australia reach production.
Iron Ore Leads Pack
But when it comes to value creation in the steel sector, iron
ore clearly leads the pack. Over the previous five years, the
prices of iron ore companies have risen a collective 400% owing
largely to the growing number of takeovers. Over the same
timeframe, steel companies were up a combined 12.1%. Met coal and
scrap iron companies were up 34% and 28.1%, respectively.
Although the value of steel companies increased only 12% over
the last five years, the value of steel companies based in Latin
America increased by a staggering 165%. The value of their Asian
counterparts, meanwhile, decreased 31.1% over the same period.
Dieter said Latin American steel companies often have the advantage
of owning their iron mines, whereas most Asian steelmakers work
with tight margins because they have to buy iron ore at market
In the question and answer session following Dieter's
presentation, he was asked about consolidation in Quebec's North
Shore where a number of iron ore players operate within spitting
distance of each other.
The players include Iron Ore Company of Canada (IOC), the
majority of which is owned by London-based
Tinto (NYSE:RIO; ASX:RIO)
; ArcelorMittal subsidiary, Quebec Cartier Mining;
Cliffs Natural Resources Inc. (
, which acquired Wabush Mines earlier this year, mostly to keep
Wasbush's iron pellet plant out of the hands of its
Consolidated Thompson Iron Mines Ltd. (
, an iron concentrate producer; and the only junior in the
Alderon Resource Corp. (TSX.V:ADV; OTCQX:ALDFF)
, which resides under the Forbes & Manhattan banner.
Quebec's North Shore features a geological belt known as the
Labrador Trough, which first witnessed iron production in 1954.
Iron mining continued unabated until steep drops in iron ore prices
forced IOC to shutter its operations in 1982.
The camp underwent a renaissance when steel prices started to
rebound in the early part of the previous decade. The iron mines in
Labrador are served by two rail lines that link to a year-round
ocean port at Sept-Îles, Quebec, an advantage not lost on
"The mine body is important but logistics are as important. And
what's very attractive about the North Shore is that you have two
rail lines in place that have lots of capacity," he said.
"Consolidated Thompson has shown it can get ore concentrate down to
the port at $30/ton. It's highly competitive to produce up at the
North Shore. . .Clearly, Consolidated Thompson could be one of the
chips that could fall."
Dieter then discussed other targets. His thesis involved
Steel Holding Corporation (AKS)
, which posted a loss in the recent quarter due to a 100% increase
in the cost of iron ore. He said companies like AK Steel, which has
a market cap of $1.4 billion, are forced to look at only the
smallest fish to meet their iron needs.
"I think there is going to be a renewed focus on attractive
companies with great ore bodies, Dieter said, "which I think
Alderon Resource has in areas with logistics already in place,
where you can actually bring the product to the market in a
reasonable period of time."
"Clearly, raw material is an absolutely critical factor in steel
manufacturing and I'm sure Alderon is going to play a major role in
that," Dieter said.
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1.) Brian Sylvester of
The Gold Report
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