Steelmaking Ingredients Gain Bullish Traction

by: Rohan C. Pease

A slew of reports and articles came out today in support of rising prices for steelmaking ingredients, including coking coal, iron ore and Moly. These indicators are bullish for commodity prices.

I closely follow iron ore news, and today Companhia Vale (NYSE:VALE) put a huge dent in the benchmark pricing structure by striking a deal with domestic steelmakers to increase the benchmark contract by 80%. The move signifies to China that it should be able to cover the same increase as their domestic mills. China will be hesitant to agree to such a high number, even though an 80% increase is still considerably lower than current spot rates. The move puts Vale and BHP Billiton (NYSE:BHP) on the same page and may lead to a more flexible pricing system for iron ore, shattering the benchmark pricing system in place for four decades. It's about time: Iron ore is the world's second-largest commodity market behind crude oil. Until last year, it was a market without futures/swaps contracts - what a momentous shift!

Also BHP will want to show EU regulators that it doesn't set prices - a good thing, if the company wants approval on the BHP-Rio Tinto (RTP) iron ore project. Obviously, a benchmark pricing structure is old school and could be seen as collusive as a cartel setting prices. Other notable iron ore miners include Fortescue Metals (OTCQX:FSUMF), founded by Aussie Andrew Forrest, and Brazilian iron ore miner MMX (OTC:MMXMY), controlled by Eike Batista.

BHP reported today that the company struck an accord with JFE Holdings' steel unit in Japan to supply coking coal at $200/ton, which represents a 55% increase over last year's price. The agreement was for a three-month contract, the first ever for such a contract. This move really underlines the shift from benchmark to flexible pricing mechanisms.

Lastly came news that Russian billionaire mining magnate Oleg Deripaska, founder of Basic Element, wants to list another of his holdings on the Hong Kong exchange. This news comes only weeks after the listing of Rusal, the world's largest aluminum manufacturer. The holding to be listed is SMR, a mining company whose focus is molybdenum, the ferrous metal utilized in steelmaking for its ability to strengthen steel. SMR produces 6% of the world's supply of moly. Other miners such as Freeport McMoRan (NYSE:FCX) also mine moly. It's important to note that SMR has leases on land containing copper, gold and silver deposits. This shouldn't be much of a surprise, since moly is usually discovered alongside copper-bearing ore. It's a nice hedge nonetheless.

What conclusions can we draw from these reports? While China PMI has cooled off a bit (still expanding, however, and a good sign of credit tightening), contract talks and other factors are helping to push the momentum of commodities prices higher - and ultimately the earnings of a lot of miners. Although employment came in better then expected in the U.S., we will have to watch subsequent months of China PMI data closely to gauge if global growth will stay on its upward track.

Disclosure: Long VALE, MMXMY, FSUMF.