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The author is Australian with a long term interest and personal stake in financial planning and management. He works within the Financial Services Industry, is a member of the FPA Australia, and is a Certified Gold Seeking Alpha Contributor. Prior professional background of 20 years in military... More
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  • Fortescue Stays Confident On China As H2 Profit Rises

    Following report in Reuters today.

    Wed Aug 22, 2012 10:47pm EDT

    * H2 net profit up 8 pct to $758 mln vs $716 mln consensus

    * Sees benefits from mining boom continuing for some time

    * Says selling all ore, sees price recovery to $120-150/T

    * On track to ramp up production to 155 mln T/yr by mid-2013 (Adds comments)

    Aug 23 (Reuters) - Australia's Fortescue Metals Group remained confident about the prospects for a pick-up in Chinese demand and prices for iron ore after posting a stronger-than-expected 8 percent rise in second-half profit on Wednesday.

    With iron ore prices having sunk to their lowest levels since December 2009 on worries about Chinese growth, investors are nervous Fortescue may face a funding shortfall for its $9 billion project to triple its annual operating rate to 155 million tonnes by July 2013.

    Australia's no.3 iron ore miner put on a brave face, saying it remains confident China's demand for the key steel-making ingredient will improve later this year as steel output picks up on the back of government moves to boost infrastructure spending.

    "In the short term we have seen an overrun of steel supply capacity and that has driven a reduction in steel prices," Chief Executive Nev Power told reporters.

    "We expect to see iron prices return to the $120 to $150 range in the short-term to medium term."

    Iron ore with 62 percent iron content .IO62-CNI=SI, the industry benchmark, fell 2.7 percent to $106.40 a tonne on Tuesday, its weakest since Dec. 16, 2009, based on data from the Steel Index.

    The slowdown in China and corresponding falls in prices for iron ore, coal and other resources has prompted major miners including BHP Billiton and Xstrata to scale back projects, with BHP shelving a planned $20 billion expansion of its Olympic Dam copper and uranium mine.

    On Thursday, Australia's resources minister said the boom that had shielded the country's economy from the global financial crisis had ended.

    Fortescue sounded a more upbeat note, hailing a "spectacular" year and saying the boom was not over by any measure.

    "There is a boom and it's continuing and those volumes will continue in the future, bringing enormous benefits to Australia," Power said

    Net profit for the six months to June rose to $758 million from $705 million a year earlier, as calculated by Reuters off full-year figures. Analysts had expected a second-half profit of $716 million, according to Thomson Reuters I/B/E/S.

    Fortescue shares steadied at A$4.15 on Thursday, valuing founder Andrew "Twiggy" Forrest's holding of about one billion shares at more than A$4 billion.

    The stock has slumped by about a third from a high of A$6.18 in March against a 2 percent gain in the broader market due to concerns about soft iron ore prices sapping the miner's capacity to fund its ambitious expansion. (Reporting by Sonali Paul in Melbourne and Lincoln Feast in Sydney; Editing by Edwina Gibbs)

    Disclosure: I am long BHP.

    Additional disclosure: This is a shared story from

    Aug 23 11:36 AM | Link | 3 Comments
  • Iron Ore Prices To Rebound On China Imports

    This article appeared in Bloomberg today - 22 August 2012

    Originating Author: Helen Yuan in Shanghai

    By Bloomberg News - Aug 22, 2012 1:53 PM ET

    A plunge in iron ore prices and shipping costs means it's cheaper for Chinese steel mills to buy the material from Brazil more than 8,000 nautical miles away than to buy the lower-grade ore being dug in their own backyard.

    China's iron ore output had the steepest decline in July in four years, signaling the world's largest metals consumer is poised to boost purchases from producers such as Brazil's Vale SA and Rio Tinto Group. Stronger demand may push iron ore higher, with the spot price set to gain as much as 41 percent in the fourth quarter after touching a near-three-year low today, according to estimates compiled by Bloomberg.

    BHP Billiton Ltd.'s iron ore operations at Port Hedland in the Pilbara region of Western Australia. BHP, the world's biggest mining company and third-biggest ore shipper, is forecast to today report a 38 percent drop in earnings to $14.6 billion in the year ended June 30, according to the average of eight analyst estimates compiled by Bloomberg. Source: BHP Billiton Ltd. via Bloomberg

    "We're using almost all imported ore to feed our furnaces now as prices have become more appealing," Wang Liancheng, an international trading manager of Hebei Tianzhu Iron & Steel (Group) Co., said by phone from Tangshan. The company, which used to buy a quarter of its needs domestically, has switched to ore from South Africa, Australia and Brazil, he said.

    China's Premier Wen Jiabao is overseeing $23 billion of investment in new mills to stimulate auto-making and housing, which will boost demand for iron ore and help revive the nation's flagging economy, which grew at the slowest pace since 2009 in the second quarter.

    Ore prices may rebound as soon as next month because of declining stockpiles in China and the nation's rising demand for construction, Vale, the world's largest iron-ore producer, said this month.

    Shipping Costs

    Australian ore for immediate delivery at Chinese ports traded yesterday at about 780 yuan ($133) a dry ton, including taxes and port storage fees, with ore from Brazil at 790 yuan, according to researcher That compares to 1,030 yuan a dry ton of ore concentrates asked by domestic miners, according to Mysteel.

    China's ore contains about 20 percent iron, compared with more than 55 percent iron in Australian ore, making it more expensive to extract, Deutsche Bank AG estimates. Brazil is three times as far from Asian markets as Australia, where Rio Tinto, BHP Billiton Ltd. and Fortescue Metals Group Ltd. produce the bulk of their metal.

    BHP, the world's biggest mining company and third-biggest ore shipper, today reported a 35 percent drop in earnings to $15.4 billion in the year ended June 30 because of falling commodity prices. The result beat the $14.6 billion average of eight analyst estimates compiled by Bloomberg.

    The company said it's selling every cargo of iron produced. Chief Executive Officer Marius Kloppers said he doesn't see a "dramatic" upside to its price.

    The benchmark Baltic Dry Index, a broad measure of shipping costs, has plunged 67 percent from October, the highest level in the past year. It takes about 40 days to ship ore from Brazil to Chinese ports and two weeks from Australia's Pilbara region.

    Building Stockpiles

    The 62 percent iron ore arriving China's Tianjin port, an industry benchmark that touched a new annual low today of $104.70 a ton, may increase to $148 a ton in the fourth quarter, according to the median of seven analyst estimates compiled by Bloomberg.

    Traders also build iron ore stockpiles in the fourth quarter because freezing weather disrupts ports in the winter months, according to Steve Rodley, London-based managing director of Global Maritime Investments Ltd., which operates 64 ships.

    Increasing exports to Chinese mills will help revive earnings at Vale and Rio, the top exporters of the raw material, who both reported in the past month a decline in profit. Rio's net income may almost double to $11.4 billion this year, according to the average of 17 analyst estimates compiled by Bloomberg.

    Record Production

    Monthly steel production in China rose to a record 61.7 million metric tons in July, according to government data.

    "There is no obvious failure in the industrial activity of Asia's steel industry," UBS AG analysts led by Tom Price said in an Aug. 20 report. "We should therefore expect a typical seasonal lift in ore prices in the fourth quarter, returning spot fines to levels above $125."

    Iron ore prices have to stay under $130 for several weeks before Chinese mines shut down, according to Carlos de Alba, an analyst at Morgan Stanley in New York. They declined below that level on July 17. Production costs in China are about $140 a ton, based on iron content, Credit Suisse Group AG said in July.

    Iron ore output dropped 8.1 percent in July to 115.5 million metric tons in China, according to the National Bureau of Statistics. That's the biggest decline in July since 2008, according to seasonally adjusted data compiled by Bloomberg.

    Still, iron ore prices may fall further to around $100 a ton in the near term, according to Chinese steel mills, overwhelmed by rising capacity and sluggish demand, have struggled to remain profitable as prices for the alloy plunged to an almost three-year low this month.

    Price Forecast

    "There's still room for imported prices to fall, while domestic mines are already struggling to stay profitable," Hebei Tianzhu's Wang said.

    China's iron ore imports totaled 57.87 million tons in July, 6.1 percent higher than a year earlier. Major Chinese steelmakers including Baoshan Iron & Steel Co., posted a combined 96 percent drop in first-half earnings, the China Iron and Steel Association said July 31.

    "Mines in China's coastal regions and in the southwestern areas are most hit by the falling prices," said Mysteel's Shanghai-based analyst Shi Zhenglei. "Mills along the coast stopped buying domestic ore, and falling ore prices also drained demand for shipping the raw material from mines in the faraway Xinjiang and Inner Mongolia."

    Chinese production could be curtailed by as much as 20 percent in August with up to 30 percent of mines losing money, Barclays Plc analysts led by Leonardo Correa said in an Aug. 20 report. They expect iron ore to trade at $120 to $130 a ton as mills restock and as seaborne material purchases gain.

    "Chinese mills are out of the market to preserve cash amid tough market conditions in the steel industry, but the trend of destocking is unsustainable," the analysts said. "The return of mills to the market should be supportive for prices."

    To contact Bloomberg News staff for this story: Helen Yuan in Shanghai at

    Disclosure: I am long BHP.

    Additional disclosure: This article is shared article from

    Aug 22 2:48 PM | Link | 2 Comments
  • Faint Praise Is No Recommendation At BHP
    Interesting article from today's Sydney Morning Herald.August 4, 2012

    By Malcolm Maiden

    Yesterday's statement is intended to send a clear signal that the board still backs Kloppers.

    ON A really uncharitable interpretation, BHP Billiton chairman Jac Nasser damned Marius Kloppers with faint praise yesterday.

    Nasser said that the group's decision to invest in US shale was the right one, and that BHP's chief executive and his petroleum division boss, Mike Yeager, were doing the right thing in shifting their shale development effort to liquids that take the oil price rather than the ravaged US domestic gas price. BHP was ''fortunate to have Marius' leadership'' and the management team he led, he added.

    Nasser also said, however, that BHP's $US2.84 billion US shale write-down was ''very disappointing'' and said the board agreed that Kloppers and Yeager should hand back their June 30 year short-term bonuses. He also stopped short of stating flatly that there were no plans to quickly bring the curtain down on the Kloppers era.

    That was a considered omission, however. The view was that it was impossible to reject suggestions that Kloppers had lost favour without simultaneously raising them. Yesterday's statement is intended to send a clear signal that the board still backs Kloppers and his team.

    Yesterday's write-down is nevertheless also a confession. Kloppers can point to the relative outperformance of BHP's share price in the past year, but he made a mistake with the first leg of his US shale invasion, the $US4.6 billion acquisition of Fayetteville, Arkansas, shale gas assets in February last year.

    The Fayetteville leases are gas-only and already extensively developed. They were fully exposed to the US domestic gas price, and BHP is one of more than a dozen oil and gas majors who have bought into US shale with plans to use their financial strength to rapidly increase production.

    The US gas price had fallen from $US14 per thousand cubic feet in 2005 to $US3.88 per thousand cubic feet in February last year when BHP bought its Fayetteville leases. It had edged up to $US4.27 per thousand cubic feet by July when it paid $US15 billion for listed US shale company Petrohawk - but by April this year was below $2 and at a 10-year low in the face of over-supply and a warm US winter that undermined demand.

    It has bounced back above $US3 since, but gas futures are about $US1.50 lower than they were when BHP first bought in, and it is that slide that has generated the $US2.84 billion write-down of Fayetteville's carrying value.

    The leases that BHP subsequently picked up with its $US15 billion takeover of Petrohawk are less extensively developed, and capable of producing both gas and liquids that take the oil price instead of the gas price.

    As the gas price weakened, Kloppers and Yeager pulled drilling rigs off the Fayetteville leases, and put them to work on Petrohawk leases that are less heavily developed, and liquid-heavy. By 2015, Petrohawk's liquids production will account for about 50 per cent of total shale production, and about 80 per cent of revenue - and it is the re-weighting towards liquids that has shielded Petrohawk from the write-down Fayetteville has taken.

    Details of the write-down were put before the risk and audit committee of BHP's board on Thursday, and BHP's board signed off on it yesterday morning. The decision to immediately announce the hit rather than wait until August 22 when the group posts its June year profit result reflects heightened awareness on all boards this year that continuous disclosure means just that, continuous disclosure.

    BHP is dual-listed in Australia and Britain, and the Australian market's continuous disclosure regime is toughest.

    ''We've seen a couple of companies here get involved in continuous disclosure issues - it's fair to say that the level of awareness of continuous disclosure issues has been elevated,'' Kloppers said yesterday. He did not name names, but Leighton's payment of a $300,000 fine for tardy disclosure would have been in mind.

    MARIO Draghi didn't come out on Thursday night and single-handledly solve the European sovereign debt crisis, and share and bond markets plunged in response, but traders were actually discounting their own unrealistic expectations.

    The European Central Bank president was never going to follow up his comment a week ago that ''whatever it takes'' to defend the euro would be done by doing everything in a single day, and the ECB can't do it alone.

    Draghi's idea is that the ECB will buy Spanish and Italian bonds in the secondary market at the same time as the European Union commits bail-out fund money to primary bond purchases, in return for expanded fiscal powers in both countries. It potentially creates enough buying power to head off a selling attack, making bond market intervention itself unnecessary.

    His hint that bonds the ECB bought would rank equally with ones held by private sector investors was also important, because private holders will sell into ECB buying and undermine its effectiveness if they risk being relegated to second-rank creditors behind the central bank.

    Germany needs to back increased financial assistance, and Italy and Spain need to agree to cede control over their economies in return for bail-outs. But all that would happen quickly if Europe's crisis flared and in that respect Draghi has outlined a plan. It will take longer to turn it into action, but it's a positive development.

    Read more:

    Disclosure: I am long BHP.

    Aug 04 10:24 AM | Link | Comment!
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