If you read my article on April 5, you know that the iron ore market is changing… a lot.
In the past, iron ore producers and steelmakers negotiated fixed, yearly prices. Now though, prices will be set in quarterly contracts linked to the spot market.
That means major iron ore producers can expect huge profits going forward, especially considering that prices are 100% higher than last year’s.
And it could easily go higher, considering China’s latest move on the subject.
Chinese firms can no longer import low-quality iron ore, which means anything with less than 60% iron content in this case. That means they can’t buy from India, the market’s third largest exporter in the world. Shipments from there contain only between 55% and 58% actual iron.
Australia and Brazil – the two leaders in the trade – don’t have to worry. Australian ore weighs in with 62% iron content, while Brazil boasts 63.5%-65%. But with India out of the running, the market has little choice but to tighten in the next few years considering China’s growing demand.
China leads the world in importing the commodity, with about 70% of the seaborne market, up from 16% in the last ten years.
Investors can get involved through one of the big boys, like – BHP Billiton ADR (BHP, Financial),Rio Tinto ADR (RTP, Financial) and Vale ADR (VALE, Financial).
Or they can choose a more risky but potentially more rewarding way of banking on the changing times.
Brazil’s “Hidden” Iron Ore Treasures
Long before the 100% rise in iron ore prices, Brazil’s rich mining sector was gearing up to meet rising demand from China and other fast-growing markets.
That includes Companhia Siderurgica Nacional – CSN ADR (SID, Financial), commonly thought of as only a steelmaker.
It does make steel. But it also has plans to spin off its iron ore and logistics assets some time this year. It’s just deciding whether to offer them together or separately at this point.
Its properties include a 32% stake in rail company MRS, along with other rail and port facilities. It also has a dominant position in Namisa, which produced 5.5 million tons of iron ore last year.
But its biggest cash cow is Casa de Pedra, one of the largest iron ore mines in the country.
Casa de Pedra produced 17.1 million tons in 2009. And CSN believes it can yield over 70 million tons per year after investing $3 billion into it. By 2014, the company even sees it producing 109 million tons annually.
That would make it a decent-sized competitor for even Vale, a fellow Brazilian company and the world’s largest iron ore producer at 300 million tons per year.
Two Calls To Profits
CSN has long argued that its share price does not factor in the value of its non-steel assets. And it believes that dividing itself into two companies would solve that problem.
It has a point too, considering that it is also Brazil’s fourth largest cement producer, and yet its shares remain significantly undervalued. Still, that shouldn’t last for long once it blatantly calls attention to its iron ore assets.
Investors should get in while the going is so good.
Another way to do that is through Usiminas ADR (USNZY, Financial). Brazil’s biggest maker of flat steel products, the company has its own plans of spinning off its mining and logistics assets.
Back in February 2008, Usiminas bought four iron ore mines for the bargain price of $925 million. And it plans on boosting annual output there to 29 million tons by 2014… more than five times their current yields. Clearly, according to the company, the mines have significant promise.
On the logistics side, Usiminas has 20% ownership in the rail company MRS and a planned port.
Though not as far along as CSN in its plans, USNZY aims to complete a spin-off this year. It then wants to look for a strategic investor to purchase 20% of the new company.
Chances are, it will find one.
Even if big miners or steel companies don’t jump at the chance, China is actively trying to boost its iron ore supplies. Last November, its Wuhan Iron and Steel bought 21.5% of Brazil’s MMX ADR (MMXMY, Financial) for $682 million.
And in March, East China Mineral Exploration & Development signed a letter of intent to buy Brazilian iron ore producer Itaminas Comercio de Minerios for about $1.2 billion.
Steel: One More Reason To Get Into The Iron Ore Industry Now
CSN and Usiminas have talents in other areas as well, specifically steelmaking.
That works well considering Brazil’s rising star as the world’s third largest auto market. And with the country building up its infrastructure for the upcoming World Cup and Olympics, both companies are well placed to sell their goods.
In short, the global iron ore industry looks very bright moving forward. And CSN and Usiminas offer relatively cheap entry points into it. Though who knows how long that may last…
Good investing,
Tony Daltorio
http://www.investmentu.com/
In the past, iron ore producers and steelmakers negotiated fixed, yearly prices. Now though, prices will be set in quarterly contracts linked to the spot market.
That means major iron ore producers can expect huge profits going forward, especially considering that prices are 100% higher than last year’s.
And it could easily go higher, considering China’s latest move on the subject.
Chinese firms can no longer import low-quality iron ore, which means anything with less than 60% iron content in this case. That means they can’t buy from India, the market’s third largest exporter in the world. Shipments from there contain only between 55% and 58% actual iron.
Australia and Brazil – the two leaders in the trade – don’t have to worry. Australian ore weighs in with 62% iron content, while Brazil boasts 63.5%-65%. But with India out of the running, the market has little choice but to tighten in the next few years considering China’s growing demand.
China leads the world in importing the commodity, with about 70% of the seaborne market, up from 16% in the last ten years.
Investors can get involved through one of the big boys, like – BHP Billiton ADR (BHP, Financial),Rio Tinto ADR (RTP, Financial) and Vale ADR (VALE, Financial).
Or they can choose a more risky but potentially more rewarding way of banking on the changing times.
Brazil’s “Hidden” Iron Ore Treasures
Long before the 100% rise in iron ore prices, Brazil’s rich mining sector was gearing up to meet rising demand from China and other fast-growing markets.
That includes Companhia Siderurgica Nacional – CSN ADR (SID, Financial), commonly thought of as only a steelmaker.
It does make steel. But it also has plans to spin off its iron ore and logistics assets some time this year. It’s just deciding whether to offer them together or separately at this point.
Its properties include a 32% stake in rail company MRS, along with other rail and port facilities. It also has a dominant position in Namisa, which produced 5.5 million tons of iron ore last year.
But its biggest cash cow is Casa de Pedra, one of the largest iron ore mines in the country.
Casa de Pedra produced 17.1 million tons in 2009. And CSN believes it can yield over 70 million tons per year after investing $3 billion into it. By 2014, the company even sees it producing 109 million tons annually.
That would make it a decent-sized competitor for even Vale, a fellow Brazilian company and the world’s largest iron ore producer at 300 million tons per year.
Two Calls To Profits
CSN has long argued that its share price does not factor in the value of its non-steel assets. And it believes that dividing itself into two companies would solve that problem.
It has a point too, considering that it is also Brazil’s fourth largest cement producer, and yet its shares remain significantly undervalued. Still, that shouldn’t last for long once it blatantly calls attention to its iron ore assets.
Investors should get in while the going is so good.
Another way to do that is through Usiminas ADR (USNZY, Financial). Brazil’s biggest maker of flat steel products, the company has its own plans of spinning off its mining and logistics assets.
Back in February 2008, Usiminas bought four iron ore mines for the bargain price of $925 million. And it plans on boosting annual output there to 29 million tons by 2014… more than five times their current yields. Clearly, according to the company, the mines have significant promise.
On the logistics side, Usiminas has 20% ownership in the rail company MRS and a planned port.
Though not as far along as CSN in its plans, USNZY aims to complete a spin-off this year. It then wants to look for a strategic investor to purchase 20% of the new company.
Chances are, it will find one.
Even if big miners or steel companies don’t jump at the chance, China is actively trying to boost its iron ore supplies. Last November, its Wuhan Iron and Steel bought 21.5% of Brazil’s MMX ADR (MMXMY, Financial) for $682 million.
And in March, East China Mineral Exploration & Development signed a letter of intent to buy Brazilian iron ore producer Itaminas Comercio de Minerios for about $1.2 billion.
Steel: One More Reason To Get Into The Iron Ore Industry Now
CSN and Usiminas have talents in other areas as well, specifically steelmaking.
That works well considering Brazil’s rising star as the world’s third largest auto market. And with the country building up its infrastructure for the upcoming World Cup and Olympics, both companies are well placed to sell their goods.
In short, the global iron ore industry looks very bright moving forward. And CSN and Usiminas offer relatively cheap entry points into it. Though who knows how long that may last…
Good investing,
Tony Daltorio
http://www.investmentu.com/
