TTY - Territory Resources

[Rimtalay]

PART2 Continued

For most investors the best policy will be to focus on the basics in Australia. Top of the list should be mid-cap haematite miners positioned between high-risk micro-caps and big-cap stocks that all the world knows already.

Here's my list

FerrAus (FRS), a low-key explorer with its foot on a potential major development in the heart of Western Australia’s iron ore country, the Pilbara.
Iron Ore Holdings (IOH), a market darling in late 2005 which fell from grace but which has an excellent tenement position in the Pilbara and has recently attracted the eye (and cash) of one of Australia’s richest men, Kerry Stokes.
BC Iron (BCI), named after Bonnie Creek in the Pilbara and a company with an extensive asset base, and a near-certain takeover target once the battle for Consolidated Minerals (which owns 27.7% of BCI) settles.
Territory Iron (TTY), a new exporter in the Northern Territory, which made its first shipment of iron ore from Darwin last month and which will almost certainly launch itself on an aggressive acquisition trail.
Centrex Metals, a wildcard in the iron ore pack with its foot on high-grade iron ore on South Australia’s Eyre Peninsula, and now looking for an export port.

Each of the stocks mentioned has attracted some interest on the market, but has not delivered the 10-times return seen in FMG over the past two years as it has rushed from $5 to $50.

FerrAus is up from a 12-month low of 34 ¢ to recent trades at $1.12. Iron Ore Holdings is up from 39 ¢ to 77 ¢. BC Iron has risen from 43 ¢ to $1.70. Territory is up from 59 ¢ to $1.10, and Centrex has risen from 14 ¢ to 49 ¢.

Despite their different locations (three in WA, one in the NT and one in SA) there are common threads linking the five stocks mentioned. Each is looking to mine or (in the case of Territory) has started mining high-grade iron ore, and each is close to a rail system, or a port.

For the best and fastest returns, stick to companies such as those mentioned above, and even consider some that have already risen strongly, such as Atlas Iron (AGO), which has a haematite deposit (plus magnetite) is close to Port Hedland and has a development agreement with FMG. It might also represent a tasty takeover morsel for FMG once it starts exporting in the middle of next year.


Territory certainly fits all the requirements and is producing now.Dilution of shares with the SPP is only good if the monies raised are used cost effectively. M.K. does not waste time sitting on his hands.The revenue from the shipments is beggining but not quickly enough at the moment to take this company where M.K. wants to go with it.

 

[Rimtalay]

http://www6.lexisnexis.com/publishe...3&topicId=102690059&docId=l:688726688&start=2

Xinhua Economic News Service

October 22, 2007 Monday 1:15 AM EST




Price hike of iron ore increases pressure on steel enterprises


BEIJING, Oct. 22 (Xinhua) – In the week after the 7-day-long National Day holiday, the price of imported iron ore has kept rising.
The inventory of iron ore at Chinese ports is only 43.5 million tons at present, 540,000 tons less than before the holiday, and most of the inventory are for self use by steel plants, a signed article of Shanghai Securities News states.

General situation is that with import arrivals decreasing and spot price remaining high, the traders are facing increasing risks and therefore are prudent in further purchase, the articles says.

If the spot price of iron ore from India keeps going high, Chinese steel plants may tilt to Australia and Brazil for their supply, an outcome that obviously will not be conducive to the pending public negotiation for iron ore prices for 2008.

Iron ore inventory of Chinese steel plants is low at present, but Chinese steel plants hardly dare to adjust the price, worrying it may produce chained effects once they increase the purchase at raised prices.

It is learned that high cost of imported iron ore has already been a burden that small steel plant can hardly bear, a result China may be glad to see under its backward elimination policy. But it has also flung great losses to other steel plants.

There are experts suggesting Chinese steel plants pay attention to iron ore development and purchase in Russia, China’s neighbor, besides their traditional supply from Brazil, India and Australia. Statistics provided by Russia show that the monthly iron ore export from Russia to China averaged 450,000 tons in the first four months of 2007, more than doubling the amount in the same period of 2006; and the proportion reached 22.5 percent.

October 22, 2007

 

[Rimtalay]

http://www.theaustralian.news.com.au/story/0,25197,22662673-18261,00.html
Iron ore talks could double the price

Robin Bromby | October 29, 2007
IRON ore doubling in price next year? Extraordinary idea, but one sector analyst (unnamed, unfortunately) told the New York oil and metals news service Platts that prices could double following 2008 contract price talks, which have begun in Tokyo.

Unlikely, but analysts' estimates have been creeping up. They started predicting a 10 per cent raise. Then, a little later, the analysts settled on a "consensus" of about 25 per cent, and now Macquarie Bank has upped the ante by predicting a 50 per cent increase.

There are signs that supply constraints are going to be a continuing headache.

It was reported at the weekend that India's exports could be down 15 per cent this year because of problems at two big iron ore ports, Mormugao and Paradip.

Brazil is diverting increasing amounts of its production to feed its fast-growing domestic steel industry. Crude steel output there for the first nine months of this year was up 10 per cent year-on-year, so it will pay to follow the local iron ore sector closely to judge which companies will ride the wave.

Producers in box seat

EXISTING producers are clearly in the box seat, provided their projects perform. Territory Resources is railing iron ore daily from Frances Creek to Darwin and the company has increased its resource to 10 million tonnes by adding in fines dumped on-site during previous mining between 1966 and 1974.

 

[noirua]

The market for Iron Ore is looking bullish in terms of U.S. Dollars, but with increasing reductions in interest rates in America parity with the Aussie is getting closer.
Despite all this, TTY look to have taken a big knock over CSM and should recover more, imho.

 

[Rimtalay]

Frances Creek flows for Territory Resources


Monday, 29 October 2007

CYCLONE Tracy and Michael Kiernan both came to Pine Creek, 200km south of Darwin, and the nearby iron ore mine of Frances Creek – one destroying its fortunes, the other resurrecting them. By Charles Amery - RESOURCESTOCKS*



Territory Resource's Frances Creek iron ore project in the Northern Territory

In September Frances Creek will ship its first iron ore exports to China from a mine that a little over two years ago did not even have any proven resources.

In February this year its resources were 9.73 million tonnes at 60.7% iron with 4.81Mt in reserves.

The 1970s iron ore field is now owned by the newly named Territory Resources, which as Territory Iron was a small but committed, low capital ASX-listed company with little to spend on exploration and development of its iron ore tenements.

Along came Kiernan – the likeable, larger than life formidable industry character who as MD had transformed ConsMin from a 200,000t to a million tonne manganese producer, and billion-dollar company.

Through his family company Crawley Resources and together with Hong Kong-based commodity traders and marketers the Noble Group, they took a 30% placement in Territory Iron, happily paying over the odds for the shares and providing what was a $30 million investment to fire up the junior and particularly Frances Creek.

Now as Territory Resources based in Perth, that small company is looking to become a mid-tier Australian resource group diversifying into a range of carbon steel material commodities via mergers and acquisitions.

"We changed the name from Territory Iron to Territory Resources to better exemplify the future direction of the company," company chairman Kiernan told RESOURCESTOCKS.

"We want to develop Territory Resources into a group with four to five different types of commodities, primarily for the steel industry of China – a carbon steel industry supplier.

"I was attracted to Territory Iron as it was then called because it was a small company which had done very well to get where it was at that time with a limited amount of capital," Kiernan said.

"Doug Stewart [the retiring managing director] started the business basically from scratch, conducted exploration without much capital and had driven the company with a limited amount to spend on exploration.

"It had proved up enough to begin developing projects and once again with limited capital basically brought the Frances Creek operation to commencement.

"So Noble and myself saw an opportunity where we could, instead of buying something, invest our money. I am not one who likes to buy businesses. I would rather invest in a company or a project to develop that company so the money goes into the ground," he said.

"We approached Territory and said we would like to take a placement and did it well above market price to demonstrate we were not asking for free kicks.

"We took 30 percent of the company at 50c a share when shares were trading about 30c, so injected $30-odd million to be used to develop Frances Creek and/or some other opportunities."

According to managing director Doug Stewart: "We were a wallflower for a while until Crawley Resources came along and took us for a dance. Now we are looking at what progeny may come out of it. Having Crawley and Noble behind us is extraordinary. Now we have taken a company with no reserves 25 months ago into production."

Iron ore was being produced and exported up until 1974 from the old Frances Creek centre within the project area but flooding and damage to its infrastructure forced its closure.

It stayed untouched for more than 30 years but as those years progressed a number of industry changes brought its economic revival closer.

Vital infrastructure had been put in place with the development of nearby rail links and new port facilities in Darwin; there were new modern exploration techniques and mining and processing equipment; and of course the vastly improved market conditions.

It paved the way for Frances Creek to once again begin producing iron ore from the Northern Territory and recently saw Territory Resources move to producer/exporter status and the railing of the iron ore to the port of Darwin for the first shipment to China.

"Frances Creek has about 10Mt of resource which will give it about a five-year mine life at an annual production of about 1.5Mt," Kiernan said.

"I have a target to double the resource base to 20Mt and double the production to 3Mt annually. Logistically that is feasible. It is a project that has never been subject to modern exploration techniques over the past 30 years.

"We always look at a project and ask where is it today, does it wash its face – and if the answer is yes, then where can you take it to and grow it.

"That was the philosophy used at ConsMin where we took a business with about a three-year mine life producing about 200,000t of manganese which now has a 15 year-ish mine life producing a million tonnes."

Kiernan's philosophy is one of aggressive exploration and having the courage and conviction to bring the desired results, and he has a good record of proving any of his sceptics wrong.

"I love proving sceptics wrong and there are some about Frances Creek, but in our assessment we consider it is more than likely we will double our resource base over the next two years and that will lead to a doubling of production to 3Mt a year," he said.

"Logistically the rail can handle that; logistically the port can handle that. The big benefit is that infrastructure is in place and on a user-pays basis.

"It is a very simple dig, crush and screen then a small 15km trucking distance to the rail link where it is taken on a tonne rate into Darwin where we will truck it about 3–4km from the stockpile area to the port.

"Later when we have the money we will run a conveyor across to cut out that rehandle which is costly and degenerates the product.

"I would like to feel that the profile of Territory Resources is to export about 10Mt of iron ore a year, probably from a couple of different tenements, so becoming involved in another iron ore project. We are certainly looking at some locations in Western Australia and South Australia."

Territory Resources will operate its different projects with fully owned subsidiaries, the first being Territory Iron for the Frances Creek project.

But Frances Creek will certainly not become a stand-alone project for the future growth of the company, and only recently Territory announced a heads of agreement to evaluate a major manganese deposit in Burkina Faso, West Africa.

The agreement was with Dubai-based Wadi Al Rawda Industrial Investments and Weatherly International – with Wadi having been granted the rights to the Tambao manganese deposit and AIM-listed Weatherly and Territory Resources agreeing to acquire a 72% interest in the project.

Territory will spend $US100,000 on a pre-feasibility program and if favourable will jointly fund metallurgical testing, a bankable feasibility study, environmental studies and site preparations.

Kiernan sees the company profile expanding to about 10Mt of iron ore annually, about 1Mt of manganese, and with Territory also starting to consider a chromite deposit overseas with the ability to produce about 500,000t a year.

He believes mineral sands, particularly zircon, has a strong future driven by the Chinese demand for ceramic tiles and possibly vanadium and magnetite making up the commodities mix at Territory, with uranium possibilities on some tenements also coming under some low key scrutiny.

At the moment as a producer the Frances Creek project stands alone, but Territory is cashed up and ready to explore and develop as well as looking at mergers and acquisitions in reaching its goals.

"The business has $30 million in the bank – probably about $10 million of that will be spent on finalising the development of Frances Creek which will then start coming to cash flow positive. We intend to spend $6–7 million a year for two to three years," Kiernan said.

Kiernan is back – did he ever go away – and he likes the climate.

"It's a great industry – with people I like – in a boom time and it ain't going to end despite what anyone says."

* This report, first published in the August 2007 edition of RESOURCESTOCKS magazine, was commissioned by Territory Resources

 

[michael_selway]

The market for Iron Ore is looking bullish in terms of U.S. Dollars, but with increasing reductions in interest rates in America parity with the Aussie is getting closer.
Despite all this, TTY look to have taken a big knock over CSM and should recover more, imho.

Hi do you know the mine life of TTY atm?

Thx

MS

CSM - Earnings and Dividends Forecast (cents per share)
2007 2008 2009 2010
EPS 13.6 60.9 54.8 46.2
DPS 6.2 21.1 21.2 21.3

 

[chewy]

I think current reserves only have it at about 5 years (although at least that means they are producing right throught the current ironore boom, whereas most emerging players will miss it). However their tenaments have only seen limited exploration in the past so it is expected that the reserves/mine life will be significantly increased soon. Their 5 years of production right through the boom ironore prices should also see them very cashed up for further exploration and aquisitions too.

 

[Rimtalay]

MK and Noble have bought in for one reason, to make money and they intend to drive TTY higher, much higher. With Noble Group onboard you can be sure TTY has a very bright future.

 

[chewy]

With more announcements like this one out today you can be dam sure! looks like those reserves are getting bigger!


"Territory has achieved outstanding drilling and assay results at the Jasmine Central and Helen 11 project areas at Frances Creek, where it has undertaken about 3,000 metres of drilling at priority iron ore targets.
Best results at Helene 11 include 40m at 62% Fe from 39m depth, while drilling at Jasmine Central identified high grade iron ore up to 67.3% Fe including an intercept in excess of 40m at 63.6%Fe."

 

[Who Dares Wins]

Yes a good announcement. Does anyone know off hand more details about the potential size of the Helene 11 and jasmine deposits? About 40m depth and 100m, 200m strike length respectively. What width?

Would like to be able to have a rough idea of what this could add to the resource.

 

[EZZA]

hi guys,

anyone reckon 1.38 is a good pickup just noticed the breakout the chart looks good to me?

 

[danc]

Looks to me like it has broken out of some sort of triangle off the 15 day ma , actualy its also a triangle on the weekly , about 3and a half times so far normal vol. I was happy to buy at 1.36 and will be looking to add. looks the goods to me fundie wise and chart wise.

 

[EZZA]

don't know much about the fundies on this one, but chart looks the goods.
move with high volume, mac d crossing up, dmi indicating a trend, also broken previous resistance of 1.30. bought in at 1.36 as well. could have picked up at 1.34 is is waited for end of day. lets see how this one moves looks promising so far.

 

[Rimtalay]

The latest Keith Goode EAGLE RESEARCH Report 1st Nov 07. It is sent as PDF but this is some of the info

TTY’s Iron ore story is very simple:

· it is based on Frances Creek in the NT of Australia (only ~200km south of Darwin),

· is haematite,

· is possibly the highest grade iron ore in Australia both in grade and loi (loss to ignition) (it appears capable of rivalling Brazilian grades),

· has an offtake agreement with Noble such that it RECEIVES SPOT PRICES for its shipments (and prices are soaring). (An additional US$5/t increases the NPV by almost 19c, so if the iron ore price is US$95/t, then the value of TTY increases to over A$2/share).

· stopped production in 1974 because Cyclone Tracy took out the shiploader (the old railway to Darwin was ailing before that too).

· Restarted production because the government built a new railway to Darwin past the mine in 2004, and then the NT government put in new port facilities and a new shiploader (costing $24m) which was completed in July 2007, ready for TTY to start shipping from September 2007.

· So it has started production debt-free with an outlay of only A$12m (and its coming probable 50% expansion to possibly 2.2mtpa to 2.5mtpa only costs about another ~A$2m) – it must be a record.



As for upside the current resources are spread over about 7km of a 35km strike length, and geological discovery techniques were poor in the 60s and 70s compared to what is capable of being achieved now, with 3d modelling, all the various TEMs etc. And latest intersections are beginning to fill in the gaps.



So : Profit (NPAT): probably $25m to $35m in the first year to June 2008 (ramping up), then possibly $65m to $80m per year after that. At $1.15 per share it had a P/E ratio of 3.3 x in 2010, and we all know that those P/E numbers rarely stay at those levels for long.



Its NPAT in the December half 2007 really depends on shipments, as to whether it can make another lump shipment or not (we don’t have another shipment in our figures, but it may be achievable) – the ore is there, it comes down to Panamax (ship) scheduling and availability, and then there’s the price received leverage with spot iron ore prices soaring. Possibly one of the issues for iron ore pricing during the coming year of 2008 is whether Fortescue can deliver on time, as Fortescue’s ore has already been processed and sold in different Chinese smelter schedules..



Although CSM rejected the TTY offer, in the fullness of time, it will probably be proven to have been the best that CSM received (it only needs to exceed $1.67 to rival Palmary’s $4.50/CSM share).



There are other upside potential factors and if you were lucky to already hold TTY before the recent SPP announcement, take the full $5000 SPP at $1/share and say thank you, otherwise :



TTY is rated as a BUY

Territory Resources Limited (TTY) – Increasing Production Towards 2.5mtpa of High Quality (~62%Fe, ~1% loi) Iron Ore



· On 28 September 2007, Territory Resources (TTY) made its first shipment of 67,500t of high grade (~63%Fe) iron ore from Darwin to China, sourcing the ore from its Frances Creek operation near Pine Creek in the Northern Territory. TTY envisages ramping up to 1.5mtpa, then towards 2.5mtpa and possibly later 3mtpa.



· TTY’s Frances Creek operation has been able to start debt-free due to the cash injection from Michael Kiernan’s Crawley Resources and very low capex below A$15m (of which ~A$10m was on facilities at the port). Mine life at this stage appears to be at least 5 years based on current resources of ~10mt and achieving a production rate of 2.2mtpa (ERA’s estimate) from December 2008.



· The Frances Creek operation appears to currently be Australia’s highest grade iron ore producer (possibly even the world’s), and aside from grade it has significant advantages over other Australian iron ore producers with the shortest shipping distance from Australia to China, and only 15km by haul road from the mine to a new railway siding ~190km south of the Port of Darwin.



· The Frances Creek mine’s original heyday was in the 60’s and 70’s and it was forced to close mainly due to Cyclone Tracy destroying the ship loader & most of Darwin in December 1974, combined with the rail freight prices increasing by 50% to try and keep the then aging railway operational. Viability was restored with the completion of the new railway to Darwin in 2004, and the Port of Darwin injecting A$24m into a new shiploader (completed in July 2007), with greater port facilities.



· Due to the advances in geological exploration techniques since the 1970’s and the ability to both upgrade and sell varying grades of iron ore through the Noble Group to China, TTY appears to have the potential to significantly increase its resources, reserves and possibly production at Frances Creek.

 

[Rimtalay]

ASX:TTY re: PRODUCERS IN THE BOX SEAT


Fat Mining 99, 31 Oct, 2007
Printer Friendly
More high-grade iron ore identified


After abandoning its takeover offer for Consolidated Minerals, the company has returned to what it does best, which is adding value to its 100%-owned Frances Creek iron ore project in the Northern Territory. The company's share price surged on the back of an announcement on Wednesday that a recent drilling programme has defined wide intercepts of high-grade iron ore at shallow depths. This is sure to add to the company's resource base.

"Frances Creek is showing all the indications of getting significantly larger."

Fat Prophets initially recommended buying Territory Resources at 36 cents in December 2005 (Fat Mining 6). Our last review of the stock was during July in Fat Mining 85.



From a charting perspective, the outlook for Territory Resources remains compelling. A sharp break higher on Wednesday saw the stock reach a high of $1.43 following more than three weeks of consolidation between $1.07 and $1.235. Since August, the stock has now rallied by as much as 142%.

With the latest break to the topside reflecting firm investor support for the stock, we believe that downside risks are limited. Any pause in the upward trend is likely to be short-lived with support between $1.30 and $1.235. Below here, the $1.07 level underpins the upward trend.

Given the clear revival of upward momentum in Territory, we believe that further gains are achievable in the months ahead. A continuation above $1.43 will initially target the all-time high of June at $1.54, with levels beyond here achievable in time.


Members familiar with Territory Resources would know that the company has been on a fairly wild ride since the appointment of Michael Kiernan as the company's Chairman. He needs no introduction, having been the former Managing Director of Consolidated Minerals. His stated ambition with Territory is to replicate the ConsMin business model by developing a diversified carbon minerals business.

He has sought to leverage off the company's recently commissioned Frances Creek iron ore project in the Northern Territory. We believe this is a sound strategy, as we believe diversification will be increasingly important, given the plethora of pure iron ore players set to hit the market over the next five years.

The company's bid for ConsMin can be described as ambitious, but we are pleased that the company has stuck to its knitting so to speak, and returned to focus on its Frances Creek iron ore project.

We must admit that outside of Territory, our long-standing favourite, we find it very hard to find value in the iron ore sector in Australia. We remain sceptical about the high development costs associated with many of the aspiring producers that will be hitting the market over the next five years. Most will have heavy debt burdens and their operations will be very sensitive to iron ore pricing.

The beauty of Territory is two-fold: firstly, it has a big head start on the chasing pack having commenced production during the September quarter; and secondly, it has developed its project on a shoestring budget when compared with most iron ore operations.

The key has been the Frances Creek project's proximity to existing infrastructure. This will allow it to avoid many of the pitfalls that could beset many of its sector colleagues that are developing isolated deposits at high cost.

As we have previously highlighted, iron ore is a relatively low margin business. The key to profitability and longer-term survival in the industry is the ability to minimise costs. Territory is in the box seat to maximize its operating margins, as all of its projects are located within 190km of Darwin and within proximity of road, rail and port facilities.



Frances Creek commenced production during the September quarter. For Members that may be unaware, the project area had a successful history of iron ore production and export until 1974, when damage associated with Cyclone Tracy and lower prices closed the mine.

A number of major changes over the past 30 years have made the revival of Frances Creek possible. The most important is the new Alice Springs to Darwin railway line, allowing transportation of ore to the port of Darwin for export. Other vital ingredients include the development of new mining and processing equipment, new Darwin port facilities, and much better market conditions, driven by China's seemingly inexhaustible demand for steel.

Territory is producing a mix of lump and fine ore through a simple crush and screening process at a rate of 1.5 million tonnes per annum (tpa). This currently gives Frances Creek a project life of just over three years based on current reserves and six-and-a half-years based on current resources.

We believe these are just arbitrary numbers as they are likely to see substantial upgrading as a result of ongoing exploration work. Territory in fact aims to double output to 3.0 million tpa and expand mine life out to ten years.

This is immensely achievable in our view as Frances Creek hosts a 35km strike length that is highly prospective for additional iron ore deposits.

Annual production of 1.5 million tonnes at a conservative operating margin of around A$30 per tonne will generate net cash flow of $45 million annually.

We believe there is significant longer term potential for Territory to increase production, as exploration leads to further increases in the resource base and hence mine life. Our confidence was reinforced by the company's exploration results announced on Wednesday.

Territory revealed that drilling on two of its project areas, Jasmine Central and Helen 11, have returned outstanding iron ore results. The program has so far comprised around 3,000 metres of drilling. Some of the best hits included 40 metres @ 62% Fe from 39 metres depth below surface at Helene 11, whilst at Jasmine Central an intercept of 40 metres @ 64.6% Fe was returned.

These results will form part of a revised resource estimate over the next quarter.

Just a few days ago Territory announced an upgrade to its Frances Creek resource/reserve base. The incorporation of around 354,000 tonnes of iron ore fines into the equation has boosted Inferred & Indicated Resources to more than 10 million tonnes @ 60.47% Fe, whilst Reserves have grown to more than 5 million tonnes.

The good news for Territory shareholders is that all of these positive developments have generated significant upward momentum in the company's share price. Furthermore, shareholders have the opportunity to add to their holdings by way of a recently announced Share Purchase Plan (SPP). The plan will raise up to $21.5 million in exploration and development funding.

The terms of the SPP are extremely attractive, as it is priced at $1.00 per share. This is 34% below Territory's closing price on Wednesday! Members who are Territory shareholders will have the opportunity to subscribe for either $1,000, $3,000 or $5,000 worth of shares. Not surprisingly, we encourage eligible Members to take up their full SPP entitlement.

The offer will close on 19 November and the new shares will be issued on 23 November, with ASX quotation to begin on 27 November.

Territory Iron continues to represents what we consider to be an outstanding iron ore play. Its project developments costs and debt levels are extremely low due, and with production underway it has first-mover advantage over most of its competitors.

Territory Resources will remain firmly held within the Fat Prophets Mining & Resources portfolio. We would encourage all eligible Members to take up their SPP entitlement in full.

Disclosure: Interests associated with Fat Prophets declare a holding in Territory Resources.

To view Mint Financial Group's disclaimer please click here.

Copyright Fat Prophets. Designed by Endorphin Interactive, Powered by eOne

 

[Icharus]

Good post Rimtalay. Fundamentals look good and there is still the blue sky of the manganese mine in Burkino Faso which looks like it is a open cut resource that needs a logistics solution to be successful. Sounds like the type of challenge that MK loves to solve

cheers Icharus

 

[Rimtalay]

Steel demand upbeat, led by BRIC nations

Steel consumption in the BRIC nations increased at a steady pace during the
decade. China, followed by India, have witnessed their steel consumption rise by a
CAGR of 18.4% and 9.54% respectively in the last five years. Compared to these
two countries, the demand growth in the other two has been slower. Brazil and
Russia have witnessed their consumption increase by a CAGR of around 5% in the
last five years.

But in the next five years, we expect Chinese consumption to moderate from its
five year CAGR of 18.4% to 11.1% in the next two years. Consumption from India
is expected to rise by a CAGR of 12.7% in the next two years as construction
spending in the economy is set to increase. In the next two years, Russia is
expected to outpace India and China and lead the overall BRIC nation’s
consumption. Russian steel consumption is expected to increase by a CAGR of 16%
in the next two years, while Brazil is expected to witness its consumption grow
around 10% in the next two years.

The BRIC countries, which accounted for about 41% of global steel demand in
2006, will again be leading the growth with an expected increase of 12.8% for
CY07 and 11.1% for CY08. Overall, 77% of world consumption growth in CY07 and
71% in CY08 will be seen in the BRIC countries.

China’s steel use is expected to grow by 11.4% in CY07 and 11.5% in CY08,
accounting for 35% of the world total. For India, forecasts for apparent steel use,
point to an increase of 13.7% in CY07 and 11.8% in CY08.

The Russian market is expected to grow by 25% for CY07 and 9.5% for CY08. The
rise is mainly led by the energy and construction sectors. Also, steel consumption in
Brazil is expected to increase by 15.7% for CY07 and 5.1% for CY08, with strong fixed
capital formation partly driven by public investment programs.

The International Iron and Steel Institute (IISI) forecasts in October show that CY07
will be another strong year for the steel industry with apparent steel use rising from
1,120.9mn tons in CY06 to 1,197.6mn tons in CY07, an increase of 6.8%. It also
expects consumption to rise further by 6.8% in CY08. These figures were revised
upwards by 0.9% for 2007 and 0.7% in CY08 over its March forecast.

 

[Rimtalay]

November 01, 2007


Steel prices: Room for upside
Government curbs to reduce supply from China
With one-third share of global production and consumption in CY06, China maintained
its position as the largest producer and consumer of steel in the world. China, in the
last five years has been the major force behind the two cycles witnessed in steel. In
the first half of this decade, China led the markets in consumption, accounting for a
major portion of world import markets. The huge domestic consumption led to local
producers adding on huge capacities. The huge increase in production capacities in
China transformed China into a net steel exporter in CY05. The surge in Chinese
exports acted as a dampener in CY06 and led to steel prices falling to around US$400
levels. Chinese exports increased month on month at a fast pace leading to an
oversupply situation around the world.
However in the last three months, the Chinese government has tried to maintain a
check on exports. It witnessed a scenario of excess liquidity in its domestic markets
and during the current year has levied steps to curb the flow of money into the
economy. One of the measures it adopted during this period was to curb exports of
primary metals. It levied extra taxes and removed the rebates received by
manufacturers on exports. The government in July removed all the rebates received
by the steel manufacturers on exports of 553 products. It has also increased its export
tax on 83 products in June this year besides increasing the export duty on steel slabs
from 10% to 15%.
CIS HR coil price chart
Source: Bloomberg

 

[Rimtalay]

Steel prices: Room for upside Part2

Soaring iron ore costs to push steel prices up

Iron ore prices, over the last one year have doubled led by a surge in the demand
from China. Iron ore prices have been debated largely as markets expect that the
surge in iron ore prices have not ended and it will continue to rise in the next calendar
year. China has been hungry for raw materials in the last five years and the demand is
not expected to slowdown in the near term. China has seen its steel production triple
in the last five years. The raw material for the production rise largely has been
supported by iron ore imports in the last two years. China imports a major portion of
its iron ore consumed as the local production accounts for only 40-45% of total
demand.

Steel manufacturing capacities in China as well as in the rest of the world are rising at
a rate of 10% in the next two years. New steel manufacturing capacities are built in
areas where the iron ore is easily available. The new capacities in the iron ore
producing areas of India, Brazil and Australia will lead to lower exports from these
countries to China. Global steel production has grown 46.4% in the last five years
from 850mn tons in CY01 to 1,244mn tons in CY06, led by 197% steel production
growth in China from 142mn tons to 423mn tons in CY06.

The strong growth in the steel demand is expected to continue and the International
Iron and Steel Institute (IISI) forecasts 2007 will be another strong year for the steel
industry with apparent steel use rising from 1,120.9mn tons in CY06 to 1,197.6mn
tons in CY07, an increase of 6.8%. BRIC nations, which accounted for about 41% of
global steel demand in 2006, will again be leading the growth in the next two years.
China’s apparent steel use is expected to grow by 11.4% in 2007 and 11.5% in 2008.
For India, steel consumption will increase by 13.7% in CY07 and 11.8% in CY08.

 

[Rimtalay]

Chinese iron ore demand estimates

2004 2005 2006 2007E 2008E

Crude steel production
274 353 423 482 597
Consumption (Mt iron ore, @63%Fe)
416 547 655 747 917

Pig iron production
257 337 404 466 566
% change in iron ore consumption
31.5 19.7 14 22.8
Source: IISI, USGS, India Infoline Research

The growth in steel manufacturing will lead to higher demand for iron ore. We believe
the shortage has been caused by booming Chinese and world steel production, a
major shortfall in seaborne iron ore exports this year and a slowdown in the rate of
growth of domestic iron ore production in China. The small price hike of 9.5% in iron
ore contracts at the start of the year was low and we expect the prices to go higher as
the year spans out. We expect iron ore contracts will be settled at 50-60%
incremental rates from that of CY07. The shortage of iron ore availability is expected
to continue and the rise may continue till CY09.

We expect iron ore contracts to rise by 50% in CY08 and 15-20% further in CY09. The
phenomenal surge in the Chinese market in recent months amid a growing shortage
of iron ore is one of the major reasons for the jump in iron ore prices.