The Commodity Super-Cycle Continues
Global steel production just hit a new record. Numbers put out by the World Steel Association said that steel production increased by 31.8% year over year in the first quarter of 2010.
The world is now producing 467.8 million tons every three months.
Granted, the last few years were awful for steel, as mills where forced to shut capacity. So in that respect, the industry is coming off a low hurdle.
But you'd also be wrong to think that this surge isn't very real...
Credit Suisse thinks that annualized global output rose in the last quarter to 1.48 billion tonnes — a new world record that beats the old 2007 high of 1.33 billion tons.
The usual suspects
This increase in production and consumption is being driven by the same old suspects: emerging markets, most notably China.
China increased production by 25.4% in the first four months of the year to 213.9 million tons. The county also hit an all-time high of 55.4 million tons produced in April.
This is a big deal.
It might be even more important to note that capacity utilization rates across the industry increased to 83.4% last month. Inventories are also falling... In the United States, stockpiles of steel are now at a low 2.2 month supply.
Prices of coking coal going up
Prices for the main steelmaking ingredient will rise to $225 a metric ton for the July quarter, from $200 a ton for the three months started April 1. Two other Japanese steelmakers also agreed to the increase.
If you don't know, coking coal is a refined coal product made by removing volatile parts of coal such as water, coal-gas, and coal tar. It is a necessity when producing iron and steel.
No coke for you
And China wants it.
A recent report from Citigroup said that coking coal will be in tight supply this year as imports to China go up. Though China is blessed with coal, it is of poor quality; domestic coke production can't meet demand.
The report predicted that prices will hit $300 a ton in the second half of this year, which would equal the top of the commodity boom of 2008. It would seem that the global commodity super-cycle continues.
Here are some more fun facts:
Brazilian mining giant Vale just bought another 24.5% of an Australian coking coal project for $92 million.
The Government of India will stop subsidizing the import of coking coal due to the fact that they have become a net importer of the material. This would double the price of coke for Indian steel producers.
Russian to restrict exports, according to Steelorbiz.com. The industry publication is reporting that the Russian government is considering limitations of coking coal exports in order to fully satisfy domestic demand. There is a shortage after a recent accident at the country's largest coal mine Raspadskaya.
Prices are rising so quickly that Der Spiegel magazine recently quoted Ekkehard Schulz, chief executive of the German steelmaker company Thyssen-Krupp, as saying:
The dimensions [of the bubble] could even be larger than the real estate problem in the US two years ago. If we are not prepared to take decisive action against raw materials speculators... they will become a serious threat to the entire steel sector and the global economy.
Perhaps Schulz is being a bit hyperbolic in his comments. You how wacky those German CEOs are...
Wen goes to Mongolia
As you know, I've been pontificating in this space about the vast Mongolian wealth in terms of natural resources since I returned from my fact-finding mission in November.
What you may not know is that Mongolia, which shares a border with China, has some of the highest quality coal in Asia... Coal that can be used as coking coal.
This — along with other assets such as copper, gold, oil, and feed stock — has led Chinese Premier Wen Jiabao and his counterpart Sukhbaataryn Batbold to meet in the Mongolian capital city of Ulan Bator last Wednesday.
The two leaders signed "nine agreements on energy, trade and environmental protection." There is also talk of opening a China-Mongolia free trade zone.
Of the agreement, Premier Wen said:
I proposed the two countries should make efforts to promote cooperation in mineral resources development, infrastructure construction and finance. I also suggested the two sides launch a feasibility study at an early date on a China-Mongolia free trade area. China welcomes Mongolia to join more regional cooperation to keep the region's peace and stability.
Many analysts and government officials I met in Mongolia and New York believe that Mongolia will be the fastest growing economy each year for the next ten years.
The official government expectation is a GDP growth of 30%. Many think it could be closer to 100%, seeing as the whole country's GDP is less than $10 billion at the moment.
Three Mongolian coal plays
I have three companies that are producing coal in Mongolia and are extremely undervalued.
One has a market value of only $18 million... And yet it produces 500,000 tons of coal a year. Furthermore, it has 70 million tons of reserves.
Most similar coal companies trade for around $8 per ton of reserves; to hit this value, this unknown Mongolian coal producer would have to increase its share price by 3,000%. That's just absurd.
One of the biggest problems with Mongolia is that the rest of the world doesn't know about it. Recently, a New York hedge fund with a long history of extracting value out of these small forgotten companies bought 54% of this company.
I expect the news of this undervalued gem to get out over the next few months.
The upside here is huge.
By Christian A. DeHaemer
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