Iron Investing News

By Melissa Pistilli-Exclusive to Iron Investing News

The Baltic Dry Index (BDI), what has been referred to as the “canary in the coal mine” for global trade health, rose 7.5 per cent on Friday. This latest development has injected a dose of optimism into the iron ore market.

“Indications are that miners have been selling more iron ore on the spot market, less expensive to steel producers than tonnage at contracted prices” said investment bank Dahlman Rose. The iron ore price on the spot market has increased $4 to $63/tonne this month.

The BDI’s rise can mostly be attributed to a resurgence in Chinese steel manufacturers’ demand for Brazilian and Australian iron ore and coal, said Mark Richardson, head of futures at Simpson, Spence & Young ship brokers.

China’s plan to invest close to $600 billion in infrastructure development is likely to boost demand for oil and other commodities. “It takes a great deal of iron ore and other commodities to produce $100 billion worth of railroads, for example, one of China’s stated objectives,” said Money Morning Editor Martin Hutchinson.

China’s largest iron importer and trader Sinosteel has said the Chinese ore market is in recovery. Between June and October of this year, China’s monthly steel production plunged 25 per cent, but has been showing positive signs in the last few weeks. Most local steel mills have returned to near full capacity, reports Yao Guoying of Steel Bus industry news service.

“Obviously a lot of [iron ore] trading companies have suffered a lot in the past two months, and many trading companies have already disappeared,” said Frank Feng, deputy General Manager of iron ore imports and domestic sales at Sinosteel. “I think the market has now stabilised and will gradually become warmer. We have already returned to profitability.” Sinosteel reportedly has plans to speed up iron ore shipments from Australia.

Brazil’s Vale do Rio Doce, the world’s largest iron ore exporter and China’s main supplier, has also witnessed improvement in the Chinese iron ore market, pointing to a halt in falling ore and steel prices.

“The prices of steel and iron ore on the Chinese spot market have stopped falling, which is a sign that the [economic stimulus package] is working,” said Director of investor relations at Vale, Fabio Barbosa. “Nobody imagines China will stop growing. This favors us a great deal in the long term.” Barbosa believes China will experience between 7 to 8 per cent in economic growth in 2009.

Most analysts are also of the opinion that the current downturn in the steel industry will be short-lived; especially, when one considers the trend seen in slowdowns that have occurred over the past 10 years, said Robert M. Miller, Senior Managing Director of a New York-based investment bank Miller Mathis. “Prices dropped 33 per cent in a downturn that engrossed the steel sector from April 1997 to March 1999. Prices dropped 12 per cent in a period of five months from April to August 2007. In a period of 10 years, we have seen the time between a downturn and a recovery has been slowly decreasing,” said Miller.

The markets are expected to pick up by late March or April, according to industry experts. “We are banking on the fundamental aspects that drive business,” said Harvey Collyer, Director Business Services at Iron and Steel Statistics Bureau (ISSB) London. “Since steel drives the infrastructure projects, we don’t see demand remaining stagnant for long.”