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TABLE OF CONTENTS Jan 7 - 13, 2013 Volume 98 Number 47 - 0 comments

Editorial: Iron miners, iron wills

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The new year kicking off with ArcelorMittal selling 15% of its Labrador Trough iron ore assets underscores the realignment in iron ore assets that has been going on around the world in recent months. Arcelor is selling the 15% stake for a cool US$1.1 billion in cash to an Asian consortium led by South Korean steelmaker Posco and Taiwan-listed China Steel Corp., with Arcelor keeping the remaining 85%. Just as importantly, Arcelor will enter into long-term iron ore offtake agreements with its new partners.

Arcelor’s Canadian iron ore assets include two large open-pit mines in the Quebec portion of the Labrador Trough, plus the Port-Cartier, Que., pelletizing, storage and port facilities. Not included in the deal is Arcelor’s high-quality but geographically difficult and undeveloped Mary River iron ore asset on Baffin Island. (In mid-December, the major agreed to sell a 20% interest in the project to its partner Nunavut Iron Ore, so that the two will be fifty-fifty partners there going forward.)

ArcelorMittal is the world’s largest steelmaker, having produced 91.9 million tonnes of steel in 2011, or 6% of the world’s total. Its mines pumped out 54 million tonnes of iron ore in 2011, with its Canadian mines accounting for 40% of the country’s iron ore production. Arcelor is also a substantial metallurgical coal miner.

However, ArcelorMittal has been struggling under a net debt load that topped out at US$23.2 billion at the end of September, and has had its credit ratings downgraded to non-investment status by most credit-rating agencies.

In its latest bit of bad financial news, Arcelor said it would write down the goodwill in its European businesses by US$4.3 billion in the fourth quarter of 2012, owing to a “weaker macroeconomic and market environment in Europe, where apparent steel demand has fallen by approximately 8% [in 2012], bringing the cumulative demand decline to approximately 29% since 2007.”

The steel giant said that this weaker demand environment, and expectations that it will persist, have led to lower cash-flow expectations for its European businesses. It contrasted the European situation to the U.S., where apparent steel consumption was up almost 8% in 2012, and is now just 10% lower than it was in pre-recession 2007.

The global iron ore game still revolves around the world’s three biggest iron ore exporters: BHP Billiton, Rio Tinto and Vale.

Iron ore prices have been softening over the last six quarters into the US$120-per-tonne range, from US$176 per tonne in the third quarter of 2011. Despite some recent bounce back, BHP CEO Marius Kloppers has been talking down the longer-term prospects for iron ore prices as new mines come online around the world, and demand from China — the number-one importer — normalizes. Kloppers said that “the scarcity pricing seen in recent years is unlikely to be repeated,” and that iron ore growth opportunities for BHP would be “volumetric, as opposed to price-based.”

As iron ore prices settle around current levels or lower, BHP Billiton and Rio Tinto’s clear advantage over Vale in terms of shipping really shines through. Simply put: it’s a much shorter boat ride to China from BHP and Rio’s Australian mega-mines than from Vale’s flagship Brazilian operations.

Vale has always tried to downplay this disadvantage by promoting the higher quality of its iron ore compared to its competitors, but the extra distance has traditionally meant another US$10 or so in shipping costs per tonne — a sum that looms large as iron ore prices decline to the the low three figures, and margins get squeezed.

To deal with the problem, Vale has been scaling-up its fleet, ordering an astounding 35 “Valemax” very-large-ore carriers (or VLOCs) that have a 400,000-tonne capacity, or more than double the capacity of a typical dry-bulk carrier at 180,000 tonnes. The first VLOC, the Vale Brasil, was delivered in 2011, and the last is due later this year.

Vale had expected the VLOCs to slash its iron ore shipping costs by up to 25%. But Chinese authorities have shown that they have a great sense of humour, and a memory of a pre-recession Vale charging Chinese steelmakers exorbitant prices for iron ore: China’s Ministry of Commerce has out of the blue banned dry-bulk carriers with a capacity of more than 300,000 tonnes from entering Chinese ports, forcing Vale to unload its brand new VLOCs at other Asian ports, and transfer the material to smaller ships, presumably negating much of the cost savings.

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