# W.A. Iron Ore, more to come!



## YOUNG_TRADER (20 August 2007)

Hi guys,

Anyone see todays ann by MIS that the Mid West/Yilgarn Infrastructure group has just recieved $750m in funding from 6 of China's largest Steel Groups to develop the Mid West Infrastructure?


Sounds like the demand for Iron Ore will be here for a lot longer


Head Office:
Suite 2, 1st Floor
32 Kings Park Road
West Perth WA 6005
Australia
Post Address: ACN 009 224 800
PO Box 1915
West Perth WA 6872
Australia
Ph: +61 8 9226 2033 Fax: +61 8 9226 3388 Email: info@midwestcorp.com.au Web: www.midwestcorp.com.au
ASX / Media Release
Midwest Corp welcomes Chinese Infrastructure Investment
Midwest Corporation Limited (Midwest) welcomes today’s announcement by Yilgarn Infrastructure
(attached) that it has negotiated the A$750 million equity required for the development of rail and
port infrastructure in the mid west region of Western Australia.
Midwest and Yilgarn are parties to an Implementation Agreement to work together to progress the
development of the port and rail infrastructure.
The raising of the equity through five of China’s biggest and most successful companies, including
our joint venture partner Sinosteel Corporation, is most encouraging for the emerging iron ore
industry in the area.
“It signals the strategic interest of major Chinese companies in iron ore in W.A. and the growing
co-operation between Chinese and Australian companies. Today’s announcement also confirms
China’s appetite for investment opportunities in W.A.”, commented Mr Bryan Oliver, chief executive
of Midwest.
The company is delighted to be associated with a group of this calibre which has the capacity to
expedite the infrastructure required to capitalise on the massive opportunities in the iron ore
industry in the region.
-ENDSDate:
20th August 2007
For further information;
Bryan Oliver Chris Codrington
Chief Executive Officer Director
Midwest Corporation Ltd The NCS Group Pty Ltd
08 9226 2033 08 9486 7188 / 0412 911 107


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## BIG BWACULL (20 August 2007)

Yeah i did someone posted it on the yilgarn mining thread  Lol


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## YOUNG_TRADER (20 August 2007)

Some more very interesting info that a mate of my emailed me just before that he got from his broker, apparantly all the brokers are still super bullish on Iron Ore



The new Iron Age, Part 2 
By Charlie Aitken


In the forced liquidity meltdown of the last few weeks anything that is owned by hedge funds and traders remains subject to aggressive profit taking/shorting. Basically, if it is liquid it is still being sold (because credit markets continue to have no liquidity forcing selling in other asset classes), and that can lead to confusion amongst investors about true fundamentals. 


Commodities and commodity stocks continue to be hit hard by this forced liquidity. It would be easy for the average investor to believe something fundamental had changed in the commodity story. In fact, nothing has changed and the true commodity story lies in the commodities that hedge funds don’t trade.



The chart above shows you that Chinese iron ore prices ROSE last week during the global liquidty meltdown. This is a pure supply demand market driven by consumers and producers. There are no hedge funds involved and it shows you that US credit market issues do NOT affect Chinese high grade iron ore demand.

Supply is very tight across Asia

Of particular interest are the Tangshan Area spot prices (yellow line) which rose last week by US$3.6/dmt to be US$104.1/dmt according to Chinese sources. That is only marginally below the record spot price reached in February 2005 of US$104.7/dmt. This is not speculator driven, this is pure supply/demand imbalance in the Tangshan Area. 30,000 m3 of new Blast Furnances are believed to be entering production in 2H07 requiring an additional +40,000Mtpa of concentrate.

On the other side of the equation Tangshan’s local iron ore supplies are struggling to maintain existing output levels. Tangshan Area’s open-pit resources are depleting, with miners needing to switch to more costly underground mining. However, many of the local Chinese miners lack the necessary drilling data on which to base their expansion decisions which is adding to production delays.

But this is not unqiue to Tangshan Area. Last week China’s average spot Iron Ore prices rose by US$3.0/dmt to US$87.6/dmt. Other provinces to experience spot price increases,ranging from US$1.3/dmt to US$7.0/dmt included Shandong, Hubei, Anhui, Shanxi, Inner Mongolia and Sichuan.

Indian export market also very tight

Indian spot Iron Ore (63.5% fe) prices also rose with contacts confirming transactions at US$108/dmt. Traders are now quoting US$120/dmt for new sales ex-India. It appears whenever possible Indian miners are blending materials to below 62% Fe to avoid the government’s highest export tax rate.


The global iron-ore spot market is dominated by Indian exports but it also provides a very important indicator of the strong industry fundamentals. Last year India provided 23% of Chinese iron-ore imports through the spot market. History shows that a significant spot price premium over the contract price is reflective of a very tight iron-ore market. It is worth noting that early in 2005 the Indian spot price traded consistently at $US95t, with a spike to over $US100t. This coincided with the massive and unexpected 71.5% increase in iron-ore contract prices. However, with the Indian spot price at $US108t, and reports as high as $US120t for new sales, the implication is that the iron-ore market has never been tighter.

In addition, the Indian spot price forms a benchmark for internal Chinese iron-ore prices. Currently Chinese steel mills are purchasing iron-ore on the spot market at $US108t and higher, consequently we think this confirms our figures on the high internal cost of Chinese production. There has been a considerable amount of comment on the increase in Chinese iron-ore production, however the fact is, that the domestic price of Chinese iron-ore struggles to compete with the Indian spot market export price. In contrast, the current benchmark contract price for Australian producers is 100% lower at $US52t. Clearly the industry fundamentals for iron-ore have never been stronger and forecasts of 25-35% rises for contract prices this year could be conservative.

Further, reports that Indian producers are blending exports with a lower iron-ore content to avoid the Indian Government’s export tax is also indicative of the low quality of Chinese iron-ore production. Chinese ore has low iron content and in the long term, the steel mills are totally dependent on higher quality Australian/Brazilian imports.

The implications of the Indian Government's imposition of an 8.5% export tax on iron-ore exports are extremely important. Last year Indian GDP growth accelerated to 9.4% after trending between 7-8% over the last few years. The reason for the acceleration is that the Government is committed to significantly increasing infrastructure spending to upgrade India’s antiquated power grid, roads, railways and port systems which are acting as a constraint to economic growth. Clearly the Indian Government is attempting to preserve iron-ore reserves in anticipation of a significant increase in commodity-intensive infrastructure spending.

While China remains the driver of global commodity demand, we believe future Indian demand is very underestimated. Our industry sources confirm that at the time of the imposition of the export tax, Chinese steel mills attempted in vain, to induce Indian iron-ore exporters to enter into contract pricing conditions similar to the Australian producers. We think the current spot price provides clear confirmation of reason for their rejection.

Baltic dry index

The Baltic dry index (BDI) measures global shipping freight rates for Panamax and Cape size vessels carrying dry bulk commodities such as iron-ore and coal. The BDI index is currently making new daily highs after recently breaching 7000 points for the first time. At the current level of 7011, the BDI index is up 105% over the last year, and fivefold since 2000. The average daily cost of hiring a Panamax vessel-a medium sized ship- last week rose to a high of $US58,500, more than double the $US25,400 price last year. In 2005 the cost was just $US10,000. In addition the annual growth of the industry benchmark tonnes-miles indicator, which tracks the weight of commodities transported and the length of the routes, increased to 6% from the historical average of 2.5%. (You should buy global tanker leasing companies)

Clearly with the impact of globalisation, trading routes are expanding, and vessels are travelling longer distances from more distant ports. In addition, severe port congestion through lack of infrastructure spending is forcing vessels to wait over a month to load/unload cargoes which is further exacerbating the pressure on freight rates. The global shipping fleet is struggling to adapt to the changing conditions. Shipyards are focusing on producing high-margin vessels such as LNG carriers, rather than building simple dry-bulk vessels which is further exacerbating the problems. Clearly there is no short term solution to the factors driving the increase in freight rates, and we think this is further confirmation of the tight market for iron-ore. 



This is all fundamental and is all happening in “Chindia” while the rest of the world is fixated on credt contagion issues.


Buying iron ore and equity

In fact, if the market rumour is true, Chinese Steel Mills have been taking advantage of the pullback in Australian iron ore producers share prices to buy equity. The market suspects Wuhan Iron and Steel have been buying FMG share on market. Apparently Wuhan, -also known at WISCO, have an off-take agreement with FMG signed in late 2006 for 4.4% of FMG`s initial planned 45mtpa of production up to a maximum of 2mpta. Wisco have also signed an agreement to contemplate additional sales tonnages of up to a further 5mpta when FMG expands its production base beyond 45mpta which they clearly have flagged they plan to.

This market rumour makes absolute sense, and it reinforces to us how desperate the Chinese steel mills are to control their destiny to a degree by owning equity in the producers with production growth. As we write above, the Chinese are struggling to expand their own production.

So while the trading world was crunching resource stocks and commodities the Chinese were buying physical equity and physical commodities. The Chinese are clearly the insider in all this and they are buying from forced short-term sellers.

Why do we keep “giving away” our iron ore?

You can see why the Chinese steel mills are taking direct equity stakes in our next generation of iron ore producers (six examples in Australian so far). It’s not only to make sure they can guarantee volume its also to make sure they benefit from the equity earnings upside when all Australian producers collectively wake up and price our iron ore appropriately.

Have a look at the chart below; we continue to “give” our product away at a discount. It’s not because our product is lower quality, it’s because as a production group we still refuse to stand up for ourselves and charge the market rate.



Look at that “freight differential” gap between what the Brazilians get and what we get. Why do we tolerate it, and why does it even exist? It is ridiculous. While the cost of moving bulk commodities is rising as we mention above, it is not the Australian producer’s fault that Brazil is further away from Asia. It’s the same product and it should command the same price.

The National Interest

Using the current contract price, and claiming no freight equalisation, Australian iron ore producers are leaving a combined US$4bil on the table per annum. That is US$4bil per annum.


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## YOUNG_TRADER (20 August 2007)

Our iron ore industry contacts suggest this situation exists because RIO has refused to follow BHP’s lead in pushing for a freight rate equalisation or at least a partial equalisation. It’s almost impossible to believe RIO doesn’t see the logic in pushing for a freight rate equalisation, but they apparently left BHP carrying the negotiating can by themselves 2 years ago and the freight rate claim failed. That failure to get a freight rate equalisation has cost Australian producers billions in revenue and cost the Australian economy billions in taxation receipts and royalties. It’s also costing us further investment in the sector as returns are artificially low versus Brazil.

This is clearly now a political issue and I believe Canberra should be pressuring all Australian iron ore producers to push for freight rate equalisation. BHP can’t pressure anyone directly, but Canberra should. RIO shareholders should also be pressuring RIO to get with the program because RIO themselves are MORE leveraged to a freight rate equalisation than BHP. They are selling assets to fund their Alcan bid but they’re leaving a potential US$2bil per annum on the table in their Australian iron ore business. That makes no sense. I can see NO downside in RIO joining BHP this time and collectively bargaining for a freight rate equalisation or partial equalisation. There is absolutely NO downside in trying, and the upside for RIO, BHP, FMG, the mid-west miners, and the Australian economy is very large. When you have pricing power you should exercise it. 

We are simply mispricing our iron ore. It is a simple as that. That National Interest is simply not served by this backward looking way we are pricing this scarce, high grade, product the world wants. Our producers must start singing from the same “pricing power” song sheet. Hopefully commonsense will prevail this year. There is too much at stake for commonsense not to prevail this time around.

We are starting to see broker analysts realise their medium-term iron ore price forecasts are too low. However, none of them dare forecast even a partial freight rate equalisation outcome. The upside to medium-term earnings forecasts and valuations is enormous even if only a partial and permanent freight rate equalisation is achieved. In terms of pure leverage no.1 is FMG, no.2 is RIO (without Alcan), and no.3 is BHP Billiton. BHP and RIO swap spots if RIO buys Alcan and dilutes its tremendous high return iron ore earnings stream. 


FMG Surface miner at work

The main debate we have with some institutional investors about the prospects for Fortescue Metals Group (FMG) is around the mining method FMG will employ. There is clearly scepticism about the use of surface miners and the rate of output they can achieve. Below is a weblink to a video of one of FMG’s new surface miners in action at the Cloud Break mine. It clearly shows there is no issue with output from this style of mining. This thing eats through the iron ore and has also been successfully tested in a much harder granite pit east of Perth.

http://www.fmgl.com.au/IRM/content/project_mining.htm


Iron ore remains the highest economic rent business in the resource sector. Australian producers are achieving lower economic rent than their Brazilian counterparts and this year they have the chance to permanently eradicate the historic driver of those lower economic rents, the freight rate differential. 

C’mon RIO, you’ve got new management and its time for some “new iron ore age” thinking.

Go Australia.


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