Is Iron Ore Bigger than Gold and Oil in China? 13 comments
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I don't necessarily agree with the title of the piece, but it's an interesting observation within this New York Times story. For newer readers, let me remind how the Baltic Dry Index (a pricing index for shipping costs which now is seized by investment pundits as one of "the tells on global growth") has been completely dominated by the Chinese and their interest in iron ore. When they are making purchases - the BDI rises, when they are not so interested, it drops.
I pointed that out while the so-called investment professionals on TeeVee had hearts aflutter that "the uptick in Baltic Dry Index surely tells us everything will soon be alright!" [Feb 9, 2009: China and the Baltic Dry Index - What's Really Going On?] But more importantly, that showing pundits being wrong for the 89th time out of 100, this dominance shows how weak global trade is - one country, importing one product (mostly from Brazil and Australia) is causing massive fluctuation in shipping rates.
If you are interested in iron ore as a stock, I've written many pieces on 2 players - Cleveland Cliffs (CLF) which is a smaller player in the US, and a major player Brazil ....I think they are on their 3rd name change but now its called Vale (VALE) - when I started the blog it was called CVRD (RIO)
- Oil, gold and rice are the commodities that often grab headlines. But for countries like China and Australia, it is the price of iron ore that can determine whether their economies go boom or bust.
- For months, China has been locked in an intense, behind-the-scenes dispute over iron ore pricing with the world’s top miners, having refused the price that steel makers in other major countries like Japan and South Korea had already accepted. [May 26, 2009: Rio Tinto (RTP) Agrees to 33% Price Cut for Iron Ore with Japanese Nippon Steel but Chinese Want More] The price haggling is an annual ritual that pits China, now the world’s third-largest economy, against exporting countries like Australia, as each acts in its best national interest. [Jun 13, 2009: Australia in Perfect Position Aside China, but at a Cost?]
- In the latest escalation of tension in negotiations this year, China has detained an Australian national who is the chief negotiator for one of the world’s mining giants, Rio Tinto, and accused the person of stealing state secrets. Three Chinese nationals working for Rio Tinto have also been detained. (that's one way to negotiate!) Whatever the details of the accusations, the detentions underscore the growing importance and extreme sensitivity of what might to outside eyes appear an arcane, dull and mysterious business: iron ore.
- In the world of iron ore trade, the relationship between China and Australia is especially tight-knit. China takes up 80 percent of the ore shipped from Australia, said another analyst, who spoke on condition of anonymity because he was not authorized to speak to the media.
- It may not command the political attention of oil — over which wars are waged — but iron ore ranks among the most important commodities in the world, the main ingredient in steel that goes into construction, bridges and ships.
- China, which is rapidly expanding its cities, imports about half the world’s supply each year. Japan, the world’s second-largest importer of iron ore, imports about 15 percent. South Korea, Germany and France follow. (again it goes without saying how dominant the Chinese are in iron ore, and in a larger sense all commodities - one of my long term theories is lack of "resources" especially that of the fresh water type - will be the cause of future wars) [May 13, 2009: Commodities - It's China's World: We Just Live in It]
- About 850 million tons of iron ore were shipped around the world in 2008. With prices averaging about $90 per ton last year, the market totaled between $75 billion and $80 billion. (that sounds huge, but it's really only 1/4th of one Citigroup bailout... I make these remarks to show you how much national treasure we've thrown at our financial oligarchs since people have become numb to the numbers... that's just 1 oligarch, for a long time headed by Robert Rubin. Again to make it clear, all the world's global trade in iron ore is but a fraction of your grandchildren's money given to (pick one) --> Goldman Sachs via AIG, or Citigroup, or Bank of America, or Fannie, or Freddie. Prosperity indeed)
- ....most of the world’s ore, unlike oil or stocks, is not traded on global exchanges. Instead, contracts are agreed upon annually between producers like Rio Tinto, BHP Billiton and Vale — which account for three-quarters of the market — and the steel makers who buy the ore, like Bao-steel Group of China and Nippon Steel Corp. of Japan.
- Each year, these companies meet behind closed doors in talks that can last as long as six months to determine the price at which various types of ore are to be shipped during the next year.
- This benchmark contract system accounts for about 70 percent of the market and is a system that gives miners the predictability they need to make the huge capital outlays needed to extract the ore from the ground. Buyers also enjoy that predictability. But with so much of the price fixed a year in advance, the stakes are huge.
- And this year, with the jury still out on how rapidly the world’s economy — and with it the demand for iron ore — will recover, the annual round of pricing negotiations has been especially intense.
- Japanese and South Korean steel makers recently accepted a price 33 percent below the previous year’s level. But breaking the usual practice of adopting these earlier agreements, China has dug in its heels and is holding out for a larger reduction, of as much as 45 percent. It can afford to. China’s growing economic importance, especially in a year of crisis like this one, has given the country’s negotiators unprecedented clout.
- “In the last 15 years or so, the global market has gone from 400 million tons a year to about twice that — and all that has been because of demand from China,” said Peter Strachan, an independent analyst in Australia. “In the last five years or so, China has become absolutely dominant in the marketplace.”
Now the irony is I used to hang out in potash and iron ore in mid 2008 thinking I'd be safe, because of (a) long term contracts in place or (b) wide moats to get to the product. So while I was in the commodity space, I thought I had found an oasis when the time would come for a commodity correction. Well lo and behold, I forgot how dominant HAL9000 is, and all the
HALs congregate in the same stocks and when its time to panic sell, they don't care about fundamentals- everything must go. So I learned my lesson; 1 year contracts versus spot pricing means nothing in a world of computer-driven trading. There was no difference in buying iron ore versus buying a company levered to spot natural gas. It's all the same to HAL.
[Aug 30, 2008: WSJ - Steelmakers Develop New Iron Recipes]
[Mar 7, 2008: Bookkeeping - Starting 2 Mining Positions Emphasizing Iron Ore]
[Feb 19, 2008: CVRD (RIO) Secures 65% Increase in Iron Ore Pricing]
[Sep 27, 2007: Shortages Here, Shortages There - Iron Ore is the Shortage of the Day]
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This article has 13 comments:
It sounds as though the Baltic Dry index is likely to be in almost one for one correlation with Iron ore shipments, which I had not realised, having assumed that things like wheat shipments would also have a major impact.
Ag. is a one way street.
CNBC is retarded in this respect, they will put up the chart of a stock like Drys and Jeff Mackie or one of the other guys will talk about Christmas season and all the consumer products being shiped over from China... that's NOT what they ship, they mostly ship Coal and Iron Ore.
Investors also care too much about the BDI as they think it measures global trade... it does NOT. It measures the spot market, but there are a ton of long term "chartered" ships that are NOT part of the spot market. Some of these shippers might be 50% to 75% chartered... Technically, the BDI can go to 0 ( unlikely), but that would not mean no goods are being shipped, it would mean that these ships aren't being bought on the spot market. Earlier this year the BDI was deathly low due to the credit crisis...
There really are a lot of variables that go into the BDI, it's not just about supply and demand either as a lot of it has to do with the ships. You see when the BDI was high, producers responded by ordering more ships to be made in the Korean shipyards to capitalize on the imbalance... Think what would happen if the fares for Taxi cabs shot up 5x, then a lot more people would go out and try and drive Taxi cabs right? Especially with signifigant barriers to entry. The only thing is that the FFA's... Freight futures ( futures on the BDI) even during boom times showed that tons of new ships would hit the market in 2-3 years and that the BDI was predicted to go down... Even in boom times it was predicted to go down. The thing is though that some of the ships to be made are falling through due to financing. Shipping is a cyclical beast and can get seasonal too. If China is in a real estate bubble as some predict, or they slow urbanization then the BDI and all these shippers can get hammered. Also, there is strong evidence to support that China has been stockpiling commodities which means they will need to import less in the second half of the year. A lot to think about.
Your comment hits me as even more knowledge based.
You should do an article.
TraderMark, any rebuttal?
As a reprise, I know nothing about these markets.
I don't think TraderMark needs to make a rebuttal because I don't really think he said anything anything that was incorrect, but a lot of people think there is a simple correlation between BDI and "shipping".
Investors do look at the BDI to track "shipping", but I don't believe it's a great way of doing such due to their being a spot market and a time charter market.
When the BDI... the spot market is high, it means that producers are looking to to pay a pretty penny to move bulk goods, but when the BDI is low... let's say it went to zero it doesn't mean goods aren't being moved, it means the short term spot market demand is low... not that there is no volume... there are always raw materials being shipped internationally.
Basically "shipping" or shippers were a way to play the commodity boom and global trade. Instead of investing in Coal, Fertalizers, Iron Ore, you could buy the dry bulk ships that moved the Coal from Australia to China or Iron Ore from Brazil to China instead of the goods themselves.
I'm not 100% positive but I believe the #1 most important commodity for the BDI is coal and not iron ore ( although I'd say Iron Ore is probably #2 or #3 and still important).
I think the point of TM's article was Iron Ore and not how we measure the BDI, but he shares so much good info that I thought I'd chime in to make a side point.
No rebuttal
Just as there are many shares traded a day, the program trading from Citadel, Goldman Sachs and the like dominate the daily volume. That does not mean there are not other participants
Same with shipping in a parallel; when China gets involved they tend to move the market because their volume dominates especially iron ore which moves capesize. That is all thrown under BDI and away we go.
On Jul 13 12:55 PM Davewmart wrote:
> John Galt,
> Your comment hits me as even more knowledge based.
> You should do an article.
> TraderMark, any rebuttal?
> As a reprise, I know nothing about these markets.
I was not trying to set up a fight!
Just learning from both of you.
Fine info.
Iron Ore is huge, imo, imagine steels and iron are needed for every constructions site the size of China! Wow, even if the global demand is dead, China sure need lots of iron ore fast.
On Jul 13 08:31 AM John Galt wrote:
> CNBC is retarded in this respect, they will put up the chart of a
> stock like Drys and Jeff Mackie or one of the other guys will talk
> about Christmas season and all the consumer products being shiped
> over from China... that's NOT what they ship, they mostly ship Coal
> and Iron Ore.
Our message is clear (to China), accept the 33% cut like everyone else or buy on the spot market, kidnapping Rio staff is not the way to go.
You lost out on Rio because you were inflexible and greedy, GET OVER IT!
And i would like to add that Copper is the new gold and reserve currency in regards to China.
On Jul 13 11:48 PM Ryu Mei Co wrote:
> LOL..... Jeff Mackie is great if you don't take his words seriously.
> The only smart one in Fast Money is Karen Fineman.
>
> Iron Ore is huge, imo, imagine steels and iron are needed for every
> constructions site the size of China! Wow, even if the global demand
> is dead, China sure need lots of iron ore fast.
It's all about China's Commodity Carry Trade, a strategy to get rid of the dollars. For that reason I am extremely bullish on shipping stocks and on strategic rare metals:
seekingalpha.com/artic...
You did play shippers like EXM a while ago. Too bad you could not hold on. EXM sees a tremendous rally today. It should make new highs in 2009 soon.
On Jul 13 01:51 PM John Galt wrote:
> Basically "shipping" or shippers were a way to play the commodity
> boom and global trade. Instead of investing in Coal, Fertalizers,
> Iron Ore, you could buy the dry bulk ships that moved the Coal from
> Australia to China or Iron Ore from Brazil to China instead of the
> goods themselves.