Tim Treadgold: Briefcase - Twists and turns in iron ore market

The world of iron ore has taken a few peculiar turns in recent weeks – some good, some bad, and some distinctly odd.

The good news is that BHP Billiton has joined Rio Tinto in stitching up a deal that underwrites continued expansion of its Pilbara operations.

The bad news is that the more market share the big boys grab, the harder it gets for anyone else to snatch a slice.

The odd news is two-fold, and relates to (a) the curious condition of the world steel market, and (b) the timing of a ‘tickler’ announcement from the State Government about the BHP Billiton deal.

In order of magnitude, it is hard to not be impressed with the $5.8 billion sales agreement between BHP Billiton and JFE Steel. Even if this is simply confirmation of something announced a year ago, it is the sort of deal that ensures long-term development of the Western Australian economy, and the creation of sustainable jobs.

Coming just a few days after Rio Tinto signed up with Gina Rinehart as a 50:50 partner in the development of the Hope Downs mine, the JFE deal means that both of the big boys of iron ore have years of expansion work ahead of them.

But what’s good for some people is not necessarily good for others, as Briefcase will explain.

First, there is the issue of the steel mills of Asia ‘filling their dance cards’. In other words, there has been a mood of panic in the air about long-term iron ore supplies so the steel makers are signing long-term deals that ensure the supply of critical raw materials.

Second, the pressure on iron ore supplies is very much a here-and-now issue. That means shortages are an immediate problem, and the deals we’re seeing done are for delivery this year, and next year – and not in five years’ time.

Gina Rinehart, after decades of uncertainty about how best to develop Hope Downs, has recognised the urgency of the situation – a position compounded by the need to meet a State Agreement deadline, and the need to write out a large cheque to Anglo American to buy it out of Hope Downs.

But while Ms Rinehart kicks her business into play, the other great hopeful of the Pilbara, Andrew Forrest and his Fortescue Metals Group, must be looking at the deals being done and wondering where to go next.

Mr Forrest’s problem is not a lack of iron in the ground. (Briefcase will never a forget a comment from a visiting American 35 years ago who said while touring Mt Tom Price: “hey, you guys, even the roads ’round here assay 40 per cent”.)

The issue with Mr Forrest is a multitude of other matters, such as access to a railway (or building his own), access to a port (same problem), and access to markets after a nasty little war of words with potential Chinese customers. No amount of talk about immense resources and reserves will diminish the fact that successfully mining iron ore (and that means making a profit) will mask the fact that it’s all about transport economics and has little to do what’s in the ground.

But, if any reader thinks these events are interesting, take the time to contemplate what’s happening in the global steel game, where prices have been tumbling all year. Yep, that’s right, tumbling – not just falling, but crashing hard, with steel coil dropping by 34 per cent from $US750 a tonne 10 months ago to $US495/t today.

Making a direct comparison with steel and iron ore prices is not totally valid because steel is traded on a spot basis, which is for immediate delivery, whereas iron ore is only sold by long-term contract. However, steel is nothing but iron in another form – and the spot market price of any product generally finds it way into long-term contract prices, which should set the scene for some interesting price haggling next year.

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If that little snapshot of the world iron and steel market isn’t food for thought, consider the way the world was told about BHP Billiton’s $5.8 billion deal. Officially, it was supposed to have been a secret until a signing ceremony early last Thursday (July 21).

In fact, the whole world knew about it because it was really nothing more than confirmation of a contract first announced a year ago.

But, even if everyone had forgotten about the original announcement, a ‘heads up’ media alert from the WA Government reminded them.

What makes this so very, very interesting is that a $5.8 billion deal might be regarded as market-sensitive information, which is probably why the Government Media Office sent out its alert notice late on Wednesday, after the Australian Stock Exchange had closed for the night.

The problem, however, is that BHP Billiton is a globally traded stock with listings in London and New York.

That means a whole pile of people, presumably including some with a reasonable knowledge of how markets work, got the heads up, which included the guts of the deal, right down to its value in these words from the WA Government: “The agreement between BHP Billiton and Japan’s JFE Steel will secure sales contracts worth $5.8 billion”.

Briefcase, and anybody else for that matter, could never prove that the share price of BHP Billiton rose on the London Stock Exchange during Wednesday trade on the strength of the media alert, but there is no doubt that the stock rose during the day from £7.43 to £7.72, a gain of 29 pence, or around 72c, which doesn’t seem a lot until converted to the roughly $50 million added to BHP Billiton’s market capitalisation.

Was there a breach of the continuous reporting requirements of the ASX? Perhaps, and perhaps not. On the Wednesday before the announcement a BHP Billiton official said the deal was confidential because it was considered “market sensitive and would be subject to a report to the ASX”. But, come Thursday, no announcement was made to the ASX because it was considered old news – though BHP Billiton was somewhat annoyed with the way the Government made a meal of the deal.

Then there is a rather interesting situation that, even if the deal wasn’t new, despite the way in which it was ‘leaked’ through the media alert designed to make it seem new, a climate was created for share traders to have a punt on the market, which they seem to have done.

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“Granting our wish is one of fate’s saddest jokes.” James Russell Lowell