Home > China Steelmaking May Lead To Iron Ore Rebound (VALE, MT, NUE, X)
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China Steelmaking May Lead To Iron Ore Rebound (VALE, MT, NUE, X)

August 27th, 2012

Jim Trippon: With Chinese iron ore prices recently sagging to around $100 per metric tonne due to what has been a sluggish demand for steel, iron ore producers and steelmakers globally are finding the results pressing on their bottom line. Steelmakers such as Arcelor Mittal (NYSE:MT) posted a nearly 30 percent drop in profit in their last reported quarter, while iron ore producer Vale SA (NYSE:VALE) just reported its revenue and profits down as well. The ongoing situation in the steel industry and therefore the intimately linked iron ore trade has been down for some time now, more so in the US and Europe, while demand had held up far better in emerging markets. China, of course, was front and center of the robust steel trade, which has slackened there in the last couple of quarters. While investors have largely fled stocks of both the commodity producers, the iron ore names, as well as the steelmakers, many investors are intensively watching and trying to gauge when the industry will stage a rebound.

China Iron Ore Prices

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Premier Wen Jiabao indicated recently that China will continue to rev up steel production, as it has been doing. Wen announced a $23 billion investment in additional steel plants which will produce steel for autos and other goods. This is part of Beijing’s commitment to reverse the slowing growth in the economy, which has continued to show lackluster demand. China has actually been exporting record amounts of steel recently, and is on course for record steel production this year. Steel exports climbed to 8.7 percent of overall production last month, as China has stepped up sales outside its own borders, given the lower prices steel is getting at home.

Naturally, the export activity is not without its critics, so that means unfair trade accusations. US companies, such as Nucor (NYSE:NUE) and US Steel (NYSE:X) fear they will be hurt by the stepped up Chinese export activity in the industry. In a Bloomberg piece, a legal representative for Nucor maintained it was “highly likely” that China was dumping steel products. Arcelor Mittal’s CFO, Aditya Mittal, however, in the same article maintained that Chinese demand and production volumes matched and indicated that his company wasn’t concerned about the possibility of dumping.

The Bigger Picture On Steel

If you unpack the chorus of unfair trade that’s sung against China by the US steelmakers, it should not mask that the US steel industry even prior to China’s economic slowdown had been in the doldrums. Profits at many of the large US steelmakers were already hard to come by, with the exception of Nucor and a few others. US Steel already had some hard years. The regular trough in the steel industry cycle was deeply exacerbated by the after effects of the Great Recession in 2008-2009, so the normal upward cycle after steel’s down cycle did not come, or didn’t come back with its usual force. With the domestic US steel industry not fully recovered, when the global slowdown of Europe and then China following that, the US steelmakers have been more than pinched.

China Steelmaking

Source: Google Images/123rf.com

Iron Ore Prospects

Investors have shunned the iron ore producers with the price still dropping. A report by Deutsche Bank predicted the price would be headed toward $90. Yet there are many investors who are watching for signs of a turn in the market. Iron ore use and steelmaking isn’t simply going to go away. It’s neither inessential nor evanescent as the prospects, for example, of a Facebook (Nasdaq:FB) or a Groupon (Nasdaq:GRPN) might be. A recent report by a UBS AG analyst suggested that even a seasonal upturn in steelmaking would boost iron ore prices to $125.

China Still The Key

Investors will and should watch the ebb and flow of China’s production and exports for steelmaking to gain some cues on industry direction. Monthly steelmaking in China was nearly 62 million tons in July, yet stockpiles are also nearly 20 percent higher year over year, so that is a dynamic to consider. The continued slow growth of China’s economy means the steel industry and iron ore prices may be slowed near term, but the larger question is when not if on the industry rebound. With Beijing’s push and support of steel, there is an attempt to stop the slide. At some point this support, if not the push, will edge results in the other direction towards a resumption of industry growth.

Written By Jim Trippon From Global Profits Alert

Jim Trippon, founder of Trippon Financial Media, Inc., is a maverick that has dedicated his investment career to helping investors make smarter financial and stock selection decisions. Trippon,  an internationally recognized expert on global and value investing, has a deep passion for finding hidden value in global equity markets. Trippon started his career as a financial statement examiner with Price Waterhouse which allows him to dissect a public company’s financial  picture and better identify hidden gems. Trippon’s savvy approach to investing and personal finance makes him in high demand by major media who seek his unique perspective on stocks and global economics. He has  been featured in top publications both in the US and abroad including  Bloomberg, Investor’s Business Daily, The New York Times, The International Herald Tribune, Stock Futures and Options Magazine, The Bull and Bear Financial Report and he regularly appears on broadcast television including as an on air contributor to CNBC, CNN, Fox Business, and Fox News.

This information was brought to you by GlobalProfitsAlert.com, a publication of Trippon Financial Research, Inc. GlobalProfitsAlert.com publishes information on Investing in the China stock market and emerging markets, dividend stock and income investing, exchange traded funds (ETFs), green energy stocks, technology stocks, global market trends and other investment information. To view archives or subscribe, visit www.globalprofitsalert.com.


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