For some months now, the most noticeable positive net portfolio flows among global resources have been directed to the broad classification of iron ore stocks, followed closely by nickel miners, and certain classifications of coal miners. By now, there should be no surprise as to the heat that continues to gather around these stocks. In Chinese waters, spot prices for iron ore have moved up to around the USD 140/tonne level, compared to contract prices trading roughly 50% lower.
There are increasingly numbers of estimates and forecasts that contract iron ore prices will be raised by up to 50% this year. Coking coal, a natural bedfellow to iron ore, and a highly specialised but bulk market, is also running up the price curve. China remains the world''s No 1 miner of iron ore and coal, but has become a net importer of both, with coal going into that mode just last year.
Nickel, a bedfellow downstream for processing into stainless steel, is back on the radar screen after radical, fundamental, changes in the market that saw prices completely collapse in the second half of 2007. Nickel pig iron is back, a product of Chinese smelters that use tropical laterite ores, typified by that available at Acoje in the Philippines. The ore is gifted limonite (usually grading 47% to 59% iron, 0.8 to 1.5% nickel, along with trace cobalt).
Outside China, significant nickel production capacity has been curtailed or shut down in the past two years, allowing for development of a new equilibrium in supply-demand. Nickel prices continue to rise; the best of breed are already back in the money. Australia''s Western Areas, which owns two of the world''s highest grade nickel deposits in Flying Fox and Spotted Quoll, recently reported a 209% increase in interim revenues for the six months to 31 December 2009. Operating cash flow increased massively to AUD 50.4m from AUD 3.8m in the comparable 2008 period.
But nickel remains a relatively small base metal. The big money is in seaborne iron ore, which has established itself over the past seven or so years as the world''s most profitable mining franchise. Brazilian supergroup Vale increased iron ore sales, including pellets, from USD 3.5bn in 2000 to USD 22.2bn in 2008. Sales fell after demand dropped in the first half of last year, and after contract prices fell sharply in the second half, to USD 14.2bn as a whole for 2009.
Vale put it so earlier this year: "Chinese iron ore imports in 2009 reached an all-time high figure of 627.8 million metric tons, up 41.6% on a year-on-year basis, driven by steel production growth and the increasing reliance on imported iron ore".
Vale''s volume of iron ore and pellets sold in 2009 reached 247mt, against 296mt in 2008, a decrease explained by the significant fall in iron ore demand during the first half of 2009. These numbers can be compared with iron ore sales, including pellets, of some 145mt in 2000.
The megatrend is summated by Vale: "In light of the increasing deterioration in quality of [Chinese] internally produced iron ore and the modernization of the Chinese steel industry, requiring higher quality raw materials, the share of imported iron ore in apparent domestic consumption rose from 15% in 1985 to 25% in 1995, and to 50% in 2005, reaching 72% in 2009".
As for coal, China became the world''s largest importer of coal in 2009. On Vale''s market intelligence, China in 2009 imported 104mt of coal, against net exports of 4.6mt in 2008. Given the increasing demand from China and India for thermal coal, the Pacific market has been increasingly tight, Vale remarked earlier this year, against a still weak Atlantic market.
The market scenario for Chinese coking coal is similar to iron ore. Vale puts it so: "There is robust demand growth derived from a continued steel production increase. On the supply side, coal fields are moving inland while steel mills are increasingly concentrated in coastal areas and requiring high quality coking coal in the face of a decline in the quality of limited coal reserves. As other countries are running steel mills at increasing rates of utilization, the market for coking coal is expected to become tighter in 2010".
Immaculate timing for new entries to seaborne iron ore would have been around seven years ago. In 2003, Australia''s Metal Group acquired Allied Mining & Processing. Going beyond substantial tenements at Mt Nicholas, the new owners promptly acquired Iron Ore Australia, along with its Mt Lewin tenements. The acquiring group bought with it a new CEO, Andrew "Twiggy" Forrest, and a change in name to Fortescue Metals. Today, with a market value of USD 13.1bn, Fortescue is one of the world''s bigger mining stocks, and Forrest features regularly in rankings as Australia''s richest fellow.
At this point, Rio Tinto and BHP Billiton, which, together with Vale, hold about 75% of the global seaborne iron ore market, rank as two of the world''s most heavily demanded resources stocks. Vale is close behind. After voracious bouts of profit taking across the second half of 2008, it seems that iron ore''s megatrend is back in place, accompanied, this time, by the rise of coking coal.