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Ore prices create mining uncertainty
It’s 6,500 miles away, yet China is the elephant in the room.
Every day, the country’s massive economy sends ripples across the Pacific that influence worldwide iron ore pricing. In turn, U.S. mining and steel companies earn or lose fortunes, affecting their ability to invest in new mines, processes and innovations in Minnesota and elsewhere.
Stockholders are in the same boat, as their investments in mining and steel-making firms experience extreme swings based on economic hiccups in China.
Although U.S. steelmakers have been operating at about 75 percent capacity since the recession, it appeared earlier this year that iron ore prices were headed toward a rebound.
“They were up today to just under $160,” P. Kelly Tompkins, Cliffs Natural Resources executive vice president, said at a Feb. 20 presentation in Virginia. But the mid-June price had fallen below $120 per ton.
Cliffs, which owns or manages six regional mines, is among the companies affected. In 2011, it earned $2.3 billion of net income on $6.5 billion of revenue. At the time, the Chinese government was funding an economic stimulus plan and construction was peaking. Pellet prices averaged $168 per per ton. During 2012, as Chinese construction declined, pellet demand also slumped. Prices averaged $128, and the merchant supplier lost $935 million on $5.8 billion in revenue.
“To the extent that the prices of these commodities significantly decline for an extended period of time, it could affect adversely our ability to generate revenues, which, in turn, could affect our financial condition, cash flow and results of operations. Reduced revenues from lower commodity prices also could affect our ability to fund growth and expansion projects,” Cliffs said in its 2012 annual report to stockholders.
It’s a different story for integrated companies like U.S. Steel, whose pellets are destined for its own blast furnaces. Another China-related factor, however, comes into play. As steel demand declines, the Asian country’s mills have excess capacity and increase their exports, including those to the United States.
“Because China is now the largest worldwide steel producer by a significant margin, any excess Chinese supply could have a major impact on world steel trade and prices if this excess and subsidized production is exported to other markets,” U.S. Steel said in its annual report. “Since the Chinese steel industry is largely government owned, it has not been as adversely impacted by the ongoing difficult economic conditions, and it can make production and sales decisions for non-market reasons. Increased imports of steel products into North America and Europe could negatively affect steel prices and demand levels and reduce our profitability,” added the mining and steel-making corporation, which hasn’t been profitable since 2008.
The impact hasn’t affected Iron Range mining employment, where the only cut, at Cliffs-owned Northshore Mining Co., was due to an unrelated customer bankruptcy.
But the price decline could affect Cliffs’ investment strategy, a June 19 Reuters story suggests. If the iron ore price declines further, an expansion of Cliffs’ Bloom Lake mine in the Labrador region of Canada won’t advance, reported the news service, quoting CEO Joseph Carrabba. Unlike most of the ore mined in Minnesota, the production at Bloom Lake is exported to China. Expansions planned next year and in 2016 would increase Bloom Lake’s production to 24 million tons – more than Cliffs’ anticipated 2013 production in all of North America. But Bloom Lake has among the highest cost structures of Cliffs’ properties, at $85 to $90 per ton.
Despite the recently declining iron ore price, most producers still earn a healthy margin, said Michigan State University Professor Peter Kakela, recognized internationally as an expert on the iron ore industry.
“The U.S. pellet production cost is around $70 per ton,” he said. “In the next one to five years, I believe there’s going to be a pretty strong price for iron ore. There’s such a strong concentration of (mine) ownership that I don’t think they’ll let the price drop down to $50, $60 or $70 per ton.”
Even if the Bloom Lake mine expansion is delayed, several other companies plan to begin or increase output, including Grand Rapids-based Magnetation, Hurley-based Gogebic Taconite and Nashwauk-based Essar Steel Minnesota, and it’s unknown how their emergence will affect the market.
• Magnetation currently supplies a firm in Mexico and the Mesabi Nugget plant in Hoyt Lakes, which manufactures pig iron nuggets for Steel Dynamics. By late 2014, it expects to supply 3 million tons of concentrate a year to an Indiana pellet plant.
• Gogebic is in the earliest development stage and may not receive permits to begin construction for two years. During its lifespan, the mine could add 2 billion tons of taconite to the market.
• By the second half of 2014, Essar intends to supply ArcelorMittal Steel USA with pellets at the rate of 3.5 million tons per year.
Carrabba told Reuters he doesn’t soon expect a significant supply increase across the Great Lakes, citing Cliffs’ eight-year contract extension to supply Essar’s Algoma steel plant in Sault Ste. Marie, Ont. That agreement, reached in June, suggests Essar’s iron ore project could be delayed, he said.
“We see a real tightening of the Great Lakes market, Carrabba told Reuters. “Clearly, Essar’s project is not coming in the time frame they said.”
Poor winter and spring weather definitely slowed construction, said Kevin Kangas, director of governmental affairs at Essar Steel Minnesota, but there are mechanisms in play to catch up.
One factor Cliffs didn’t mention about its Algoma supply accord was that it adjusts pellet prices.
“This agreement delivers a revised formula that puts Essar’s iron ore cost in line with the market price from 2014 to 2024. The extension provides for supply under more favorable terms and is a necessary step toward ensuring the profitability and sustainability of the business,” Essar Steel Algoma CEO Kalyan Ghosh said in a news release. And beginning in 2017, Essar Steel Minnesota also will supply Essar Steel Algoma, which currently is using only one of its two blast furnaces.
Meanwhile, Cliffs is preparing an expansion plan of its own. Earlier this year, the company produced a direct reduced iron (DRI) product at its Northshore plant. Now, it’s researching how much it will cost to produce DRI which, unlike a taconite pellet, can be used as feed stock in electric arc furnaces that manufacture steel. But like taconite, its success will depend on keeping production costs below ever-fluctuating market prices. Cliffs currently is researching what it will cost to make a direct-reduced iron pellet.
Economic uncertainty has complicated the process of making large investments, Kangas said.
“Anybody trying to raise money for a large capital projects will find the financing difficult. We’d all like the economy to improve, but good projects like ours will advance no matter what,” he said.
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