17/01/2006 - 21:00

Briefcase: Tim Treadgold - Seeing through the froth and bubble

17/01/2006 - 21:00


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Steel, in case hot-headed speculators playing the Australian stock market had not noticed, is essentially made by blending two materials – iron ore and coal, with a bit of limestone tossed in, plus nickel and other stuff for speciality steels.

Briefcase: Tim Treadgold - Seeing through the froth and bubble

Steel, in case hot-headed speculators playing the Australian stock market had not noticed, is essentially made by blending two materials – iron ore and coal, with a bit of limestone tossed in, plus nickel and other stuff for speciality steels.

Before thanking Briefcase for this Steel 101 lesson, move up to Steel 201 and consider this entry level question. Why is the price of iron ore expected to continue rising if the price of steel has been falling, as too is the price of coking (or metallurgical) coal used to make steel?

Tricky, isn’t it? On the one hand we have the end product of steel-making – billets, rolled coil, and slab – slipping in price around the world because of over-production, and last week the price of coking coal was slashed by 25 per cent, a drop sufficient to send a small shudder through the share price of Wesfarmers, even though coking coal is a small part of its formidable arsenal of assets.

On the other hand, however, iron ore appears to be in a world of its own, which is causing much delight around Perth, arguably the world centre for globally traded iron ore.

Over the past few weeks we have even read breathless reports of yet another increase in the price of iron ore, compounding last year’s 71.5 per cent upward hike, and making it four years in a row that iron ore prices have gone up.

Price-rise tips range from 10 per cent as high as 20 per cent with speculation of a rise pushing up the share price of almost everyone with a finger in the iron ore pie, even at the top end of the spectrum where Rio Tinto seems to be comfortably holding a price north of $70 a share, which is roughly double where the stock was 14 months ago.

At the small end of the game, the place which Briefcase finds the most fun, it is even more exciting as punters line up for the outcome of the current ‘mating game’ being played by Australian iron ore sellers and Asian buyers.

Fortescue Metals Group, the vehicle which has enabled Andrew (Twiggy) Forrest to prove wrong the old adage that a soufflé never rises twice, has moved into hyper-drive as the price talks are heading for a climax around the same time he is expected to announce a series of major developments, including a debt and equity funding package, more sales agreements, and the awarding of contracts to build a railway and port.

Readers with reasonable memories will fondly recall that a similar period of extreme excitability occurred between early 1997 and late 2000 when Mr Forrest was the ‘nickel king’ with his Murrin Murrin project. Back in the nickel days, Anaconda Nickel soared from $1 to $13, before sagging alarmingly to around 48c by the end of 2002.

This time, as we are often told, it is different. There is no technical complexity. Just dig and deliver; but it is at this point that Briefcase asks these questions: deliver what, when, to whom, and at what price?

The what is iron ore, obviously, but of a grade which appears to be lower than that of other producers. When is supposed to be starting next year, or thereabouts. The buyers are Chinese (but few names, yet), and the price, presumably, is a function of the iron content in the ore, which means lower than the major miners who own the best ore.

This is where Briefcase asks readers to think very carefully, because there seems little doubt that even if the current round of price talks results in an increase, it may well be the last in this great pricing cycle. Massive project expansions by the big boys of iron, including Rio Tinto, BHP Billiton and Brazil’s CVRD, are under way, but are yet to hit the market, something that will start to occur from later this year.

In other words, the great iron ore game is entering its end-phase, and the invisible hand of Adam Smith, the long-dead Scottish chap who identified the force of supply rushing to meet strong demand, is at work.

In the humble opinion of Briefcase we are now in the ‘froth and bubble’ stage of the resources bull market. Precisely the same conditions that lifted Anaconda Nickel to $13 back in 1999.

This time around there will probably not be the same powerful correction such as that triggered by the technical failures of Murrin Murrin and the other laterite nickel projects, just a long, slow, fizzle, as the crushing inevitability of excess supply grinds markets down – precisely as has happened in the steel and coking coal markets.


On a lighter note, it can be reported that trouble looms in paradise, and the owners of several ‘McMansions’ in Cottesloe are feeling deeply aggrieved at the potential for poorer people to live nearby.

The area causing great consternation is currently used as a depot by the Cottesloe Council. However, in a recently circulated draft town plan the depot attains an R30 and/or R40 zoning, which can allow housing of Subi Centro density, around one dwelling per 220 square metres – and “grouped” at that.

The big issue for people backing on to the depot, including former Hartley Poynton chief executive, Tim Moore, and biotech company director, Graham Dowland, is that their recently built mansions are zoned R20, which permits one dwelling per 500sq m.

Worse still, from reading the document circulated by the Cottesloe Council, the depot is classified as “special development”, with “height subject to Council determination” – in other words, the plan as it now stands, has no height limit.

Common sense would say that a reasonable height limit will be applied, but as if the thought of having people living Subi Centro style in your backyard is not bad enough, it looks as if it’s possible to have these densely-packed sardines looking down on the richer folk in R20 land – little wonder that a stiffly worded petition is zooming its way to the council as you read this hot news item from paradise.


“Rich bachelors should be heavily taxed. It’s not fair that some men should be happier than others.” Oscar Wilde


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