Recovery in Commodities = Profitable Opportunities

Robert Hsu, November 03, 2009

In this Issue:

Robust Chinese Demand Driving Commodities Recovery
A Bullish Outlook on Gold
A Recovery in the Steel Industry
Profiting from a Rebound in Steel Demand

A Recovery in the Steel Industry

Aside from gold, iron ore has been one hot commodity in 2009. The key ingredient to making steel has received a lot of attention this year as lowered demand from steel mills brought about heated discussions on contract prices for iron ore.

For 2009, iron ore demand is about half of what it was in 2008. Because of the substantial drop in demand, three of the world's big iron ore producers -- BHP Billiton, Vale and Rio Tinto -- agreed to cut contract prices by 33% with Japanese, Taiwanese and Korean steelmakers. As a result, prices have dropped from about $102 per ton last year to $77 per ton this year.

China, though, was looking for a 45% price cut. As a result, iron ore negotiations have continued throughout the year. Back in July, a number of Chinese steel mills accepted a temporary price cut of 33%, but the country's bargaining body of steel producers continued to push for a larger price cut.

Despite China not concluding iron ore negotiations earlier this year, the country's iron ore imports surged to new highs this year. In July, China's iron ore imports increased 35% year on year to 56.5 million tons. The Chinese government's $586 billion stimulus package is behind the increase in iron ore imports to the country, as a large portion is dedicated to infrastructure.

The country's steel output – based on the increase in iron ore imports – could now increase 10% in 2009 or 50 million metric tons. Because of the rise in production, inventories are high, and steel mills have been slashing prices. As a result, profits at China's largest steelmakers are falling -- down 78% in the first nine months of 2009.

This uncertainty and oversupply in China's steel industry is one of the reasons why I've avoided investments in Chinese steel companies this year. But, on the flip side, the increase in demand from China -- and other nations that implemented stimulus packages -- is helping the global steel sector as a whole stabilize.

In fact, steel prices in the U.S. and Europe remain relatively stable, and global inventory levels are currently at very low levels. South Korea's steel inventory levels, in particular, are sitting near 2006 levels. So despite China's high steel inventories, low overall global steel inventories could help keep global steel prices at higher levels.

And that's creating profitable opportunities in global steelmakers, like my Asia Edge recommendation in South Korea's largest steel producer.

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