sexta-feira, 12 de dezembro de 2014

Investing in Iron Ore is really investing in Construction in China

When I first started interresting myself for the iron ore industry I though: ok, I know that Steel is a horrible business, with overproduction, I know that China has a construction bubble with houses being built that noone will use, but iron, that sounds nicer! It probably has a lot of other uses besides still, and has a pretty decent price. It can't possibly fall back to the same prices like 5 years ago... except that it did:

If you look at the bigger picture, unfortunately there might be still much more room to fall. One might thing: Oh, if they had big profits in 2007 with iron ore at US$35, why not now with iron ore at $68? Well, at that time the costs were much lower, mining taxes around the world were lower, salaries were much, much lower, etc. With time, every mine loses productivity as the best parts are extracted first. It's not really clear that Vale can profit now with iron ore at $68 like it profited in 2007 with iron ore at $35. Their current level of productivity clearly says that they cannot do that, although the management claims to be cutting costs.

So what went wrong? What did I miss? Why shouldn't I have trusted that iron ore prices would stay high?

1> Iron ore is really only used to make Steel

99% of iron ore demand is for steel production. Iron pellots and coke coal are also used only to make steel.

2> The world-wide steel industry has a cronic overcapacity problem
This year, steel mills around the world have a production capacity of 1.8 billion tons but will take orders for only 1.5 billion tons. And instead of consolidating and becoming more efficient, the industry is building still more capacity. 
By 2016, an estimated 100 new mills, with total estimated supply capacity of 350 million tons, are expected to come on stream, according to industry executives and consultants. Companies in Vietnam, Argentina, Ecuador, Peru and Bolivia, all backed in some way by their governments, are building or planning new mills. 
Officials in these countries say they want to invest in industrial development, supply homegrown steel to their manufacturers and cut imports. But what may appear to be welcome developments for local economies has reverberations through a global industry.
"You see people wanting to build new facilities all the time, all over the world," says Dan DiMicco, CEO of Nucor Corp. NUE -1.34%  , the second-biggest U.S. steelmaker, and a proponent of more consolidation. 
"You can argue about what needs to happen next," said Charles Bradford, an analyst with New York-based Bradford Research Inc. "But no question: there is too much capacity."
Getting a definite count on the number of steel mills in the world and actual production capacity is difficult in large part, say industry officials and analysts, because there are hundreds of small, uncounted mills in China, which accounts for 46% of world steel output. Estimates for the number of steel mills in China range from 600 to 800 mills.

3> China accounts for half of the world iron ore consumption

4> Rio Tinto, BHP, Vale and everyone else is growing their iron ore outputs non-stop:

5> Steel in China is really dependent in it's usage for the construction of new buildings:

6> China has already too many empty buildings



7> Steel is also used to build cars, but some manufacturers are moving to aluminium


Things look really ugly for the future of iron ore prices!!!

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