Today's Market View Including Arcelor Mittal, IRC Ltd, Rio Tinto and Afferro MiningJanuary 17 2013, 11:23am
BHP Billiton bought 100,000t of iron ore in the spot market on Wednesday for February delivery at $145.5/t
• The move may serve to hold iron ore prices at higher levels after prices fell 4.9% yesterday from over $150/t.
• BHP’s buying of iron ore may be in reaction to better than expected demand by BHP iron ore customers or in anticipation of further potential supply disruption for deliveries out of Western Australia. Iron ore exports have been delayed out of Western Australia due to cyclone ‘Narelle’ in the area.
• The purchase is seen as unusual and may be designed to tighten up the market ahead of a potential slowdown in demand over the Chinese new year.
• Poor weather in China has cut local Chinese iron ore production raising iron ore prices in the spot market.
Mali – EU to back French in war against terrorists in Mali
• Military support and the build up of forces continues to grow in Mali as western nations fear development of a potential hard-line Islamic state in the Sahara
• The first Nigerian troops are due to arrive shortly and will be supported by troops from Burkina Faso, Niger and Mali
• The French are using airbases in Chad to launch their bombing raids
Snow warnings for UK
US - Industrial production advanced in line with expectations by 0.3%mom in Dec, compared to a revised 1.0%mom growth in Nov (down from 1.1%).
• Production of business equipment was up 1.3%mom; construction supplies were up 1%mom and motor vehicles and parts increased 2.6%.
• Growing production is not feeding inflation. Consumer price index was unchanged in Dec, in line with estimates and up from a 0.3%mom decline recorded in Nov. CPI increased 1.7%yoy in Dec.
• CPI ex volatile food and energy advanced 1.9%yoy (1.9%yoy est. and 1.9%yoy in Nov) as energy costs fell.
• FY2012 inflation totalled 1.7%, down from 3% recorded in FY2011. Prices advanced 2.4% on average annually over the past decade.
• Fed Beige Book released yesterday showed loan demand is broadly unchanged with some districts recording a pick up in lending. The book covered a period form mid-Nov to early Jan.
• “Economic activity has expanded since the previous Beige Book report, with all 12 districts characterising the pace of growth as either modest or moderate,” the central bank said.
• Census Bureau will release housing market data late today: Building permits are forecast to grow 0.5%mom to record 905k in Dec, the highest since mid-2008.
Housing starts will grow 3.3%mom to 890k in Dec, the best monthly run in 4.5 years.
• Initial jobless claims are expected to ease to 368k in the week ended Jan 12, down from 371k posted in the previous period.
China - GDP data will be released tomorrow that may show the economy grew 7.8%yoy in Q4, up from a three-year low of 7.4%yoy in Q3. This will the first increase following a seven-quarter slowdown on state infrastructure projects and subsided inflation.
• Industrial production may have increased 10.2%yoy in Dec, up from 10.1%yoy in Nov.
• Retail sales grew 15.1%yoy in Dec, up from 14.9%yoy gain in Nov.
Europe - The ECB plans to toughen loan collateral rules, especially, for non-marketable assets according to unnamed sources.
• Loans, credits and deposits used as collateral for borrowing from the ECB jumped 60%to an average of €668bn during Q3, accounting for 27% of total collateral.
Australia - Unemployment rate increased to 5.4% in Dec while payrolls grew by 148,300 last year after a 49,800 gain in 2011 making it the worst two year job growth since 1997.
• Weak employment data will provide more obstacles for the re-election of Julia Gillard this as Prime Minister this year.
South Korea - Producer prices fell 1.2%yoy in Dec, the largest decline in three years, on stronger won that cut the cost of imported oil and raw materials.
US$1.3320/eur vs 1.3270/eur yesterday. Yen 88.65/$ vs 87.88/$. SAr 8.777/$ vs 8.863/$. $1.602/gbp vs 1.601/gbp
Gold US$1,682/oz vs US$1,681/oz yesterday - Gold prices are range bound on uncertain global economic outlook and continuing talks regarding US debt ceiling.
• GFMS/Thomson Reuters forecasts prices to grow to US$1,900/oz and average a record in H1of the year on purchases by central banks.
• SPDR gold holdings fell to 1,334t (42,903koz) valued at US$71.9bn from 1,337t (42,980koz) yesterday.
Platinum US$1,685/oz vs US$1,667/oz yesterday
• Anglo American Platinum said striking miners start to return to work at Rustenburg and north of Pilanesburg.
• Holdings in platinum backed ETPs advanced to record 53t yesterday. (Bloomberg)
Palladium US$722/oz vs US$709/oz yesterday
Silver US$31.45/oz vs US$31.27/oz yesterday
• Holdings in silver backed ETPs advanced to record 19,115t yesterday. (Bloomberg)
Copper US$ 7,969/t vs US$7,981/t yesterday - Prices are little changed today ahead of Chinese GDP and industrial production data.
• Workers at the Antofagasta port in northern Chile went on strike after three fellow employees were fired.
• Asian copper smelters raised treatment and refining charges by 10% for 2013, a third annual increase, amid rising supply of copper.
• Jiangxi Copper, Chinese biggest copper smelter, agreed US$70/t and USc7/lb charges with Freeport-McMoRan, up from US$63.5/t and USc6.35/lb in 2012.
• World copper production may exceed demand in 2013 for the first time in four years, according to Pan Pacifc estimates.
• Surplus may total some 199,000t this year, compared with deficits of 95,000t in2012 and 132,000t in 2011.
• Chinalco Mining Corp, a subsidiary of China’s largest aluminium producer, plans to raise US$435m in a Hong Kong IPO to fund its copper project in Peru.
Aluminium US$ 2,050/t vs US$2,038/t yesterday
• Supply outpaced demand by 365,100t in the first 11 months of the year, compared with a surplus of 1,890,000t in FY2011. (World Bureau of Metal Statistics)
Nickel US$ 17,440/t vs US$17,423/t yesterday
Zinc US$ 1,984/t vs US$1,985/t yesterday
Lead US$ 2,267/t vs US$2,273/t yesterday
Tin US$ 24,975/t vs US$24,900/t yesterday
Oil US$109.6/bbl vs US$110.4/bbl yesterday
Natural Gas US$3.402/mmbtu vs US$3.414/mmbtu yesterday
Uranium US$42.25 (close 16/01/13) unch on the previous close
Iron ore - China will import 770mt of iron ore in 2013, up 3.6%yoy, president of the nation’s Metallurgical Industry Planning & Research Institute said.
• The nation imported 743mt in 2012, up 8.3%yoy.
Afferro Mining (LON:AFF) – Confirms Discussions On going with Potential Suitors including Jindal Steel
• The company has issued a statement following press speculation that Jindal Steel is no longer in talks with the company.
• The company has confirmed that it is in talks with a number of potential parties including Jindal Steel and Power Ltd.
Conclusion: This is good news for the company as they need interest from parties with the capacity to take on a project of this size. The power requirements for the project as well as transport infrastructure should make this an interesting investment for a partner looking to make an infrastructure investment. The share price should be supported by the cash that the company has to keep the project going while it has discussions with interested parties. We remain buyers.
Arcelor Mittal (NYSE:MT.) – Bids $1.5 bn for steel plant in Alabama
• Arcelor is one of the bidders for ThyssenKrup’s steel plant in Alabama with Nucor muted as the other bidder.
• The Alabama plant which makes high grade steel for auto makers in Southern US is thought to have a capacity of 5 Mt a year.
• The plant has been operating below capacity and is thought to be the largest steel mill built in the US for four decades.
• ThyssenKrupp invested in plants in the US to link in with production from Brazil where production cost overruns eroded profitability.
IRC Ltd (HKG:1029) - Strategic Investment Brings Capital for Further Development
• General Nice and Minmetals Cheerglory group have invested in 851.6m new shares of IRC to a value of HK$1.84bn (US$238m).
• New shares are being subscribed at HK$0.94 a share and once invested will give the Chinese Group a holding of 31.43% of the enlarged group.
• As a result of this investment the shareholding of Petropavlovsk will be diluted from 61.13% to 40.43% of the company and will cease to treated as a subsidiary of Petropavlovsk and no longer be consolidated in their financial statements.
• Approval from UK shareholders of Petropavlovsk will be sort for the latter.
• General Nice will have the right to nominate to NEDs to the board following the transaction.
• 90% of proceeds will be used to fund the development of the K&S project and the Garinskoye project and 10% for general working capital purposes.
• There is an offtake agreement linked to the transaction over all IRC’s iron ore production outside the current production from Kuranakh.
• The offtake price will be at an average of the relevant Platts IODEX iron ore fines price for 20 days prior to the bill of lading date less 7% of that prices based upon dry weight and iron content.
• Under the offtake arrangement IRC will pay a Dry Port Marketing commission to the investors of around 5% of revenues.
• Caps to the offtake will be 3.5 mt for 2014, 7.6 mt for 2015 and 12.1 Mt 2016 to 2029.
Conclusion: This is a good deal for IRC it brings in a strategic investor from its main Chinese market at a time when the company has a big development programme that needs to be funded. That this can be funded with a cash injection and not debt is good news and where the parent’s balance sheet is under pressure. K&S is on track for production in 2014 with Kimkan coming on stream with around 3.1 Mt and ramping up to 4.5 Mt and the structure of the offtake in terms of caps reinforces the growth potential from K&S and then Garinskoye – operating costs for these operations are expected to be much lower than for Kuranakh and is projected to be around $60/t FOB.
Rio Tinto (LON:RIO) - $14bn writedown and surprise resignation of Tom Albanese
• Rio has said it expects to take a $14bn write down most of which $10-$11bn will be attributed to the Alcan business.
• Alcan which was bought in 2007 for $38bn will now have be written down by $20bn following a $8.9bn charge last year.
• The company will writedown their investment in coal in Mozambique by around $3bn – they paid A$3.9bn for Riversdale in 2011.
• Tom Albanese is to be replaced by Sam Walsh who ran Rio’s successful Iron Ore Division.
Conclusion: The write downs are not entirely a surprise but are still painful – the aluminium business has been an under performer for Rio and write downs were always on the cards – the Alcan acquisition will now be on the books at 47% of the original acquisition and Riversdale which we viewed as a poor quality coal asset pretty much written off.
Tom Albanese had to take the fall since these acquisitions were done under his watch. Having an insider such as Sam Walsh taking over is good news for the company given his success in building up the iron ore business. Once these write downs are out of the way the market can focus on Rio’s initiatives to cut costs where in iron ore they have an ambitious target to bring down CFR cost/tonne to around $35/t from the current $47/t. If they are successful in achieving this that could be significant upside to the valuation of the shares.