Good Reading, for thsoe still wondering whether Iron Ore is...

Good Reading, for thsoe still wondering whether Iron Ore is still in vogue.

The following article was posted in August 08 on IronInvestingNews.com

By Melissa Pistilli.

Economic woes in the U.S. and Western Europe may be stalling growth in the construction sector and lessening demand for materials like iron ore, aluminum, and copper; however, “prospects for the iron ore market remain positive,” says Chris Griffith, CEO of Kumba Iron Ore. One of the main reasons for this positive outlook is that many other economies across the globe remain robust.

Strong economic growth in industrializing nations is helping to put upward pressure on iron ore prices. Demand for iron ore and steel remains robust in Brazil, Russia, India, China, the Middle East and Eastern Europe. For example, China is predicated to “consume 35% of the world’s steel this year with Russia, South America, Saudi Arabia and South East Asia all predicting growth in excess of 10%.” The demand for steel in Japan also remains strong in the auto, shipbuilding, machinery, and other industries.

In five years, growing demand for iron ore has quadrupled prices, which have increased 71% in the last twelve months alone. Although many miners have experienced decreases in share price and revenue during these slow summer months and hard economic times, most iron ore producers are seeing their profits propelled higher by burgeoning economies around the globe.

Anglo American, the world’s fourth-biggest miner, has seen its profits increase by 15%. Last week, Kumba Iron Ore (64% owned by Anglo American), reported a 75% increase in first-half earnings. Iron-ore prices rose 9.5% in Kumba’s last year annual contracts with steelmakers and have increased 97% this year. The company expects to settle price increases this quarter with Baosteel Group Corp. and ThyssenKrupp AG, amongst others.

Prices have risen dramatically on particularly strong demands for iron in China where a third of the world’s steel is produced. Benchmark prices set by BHP Billiton and Rio Tinto with Chinese purchasers increased at the highest rate in nearly a decade. On Tuesday, Rio Tinto reported that all its Asian customers have agreed to a 96.5 percent price hike for ore delivered between April 1, 2008 and March 31, 2009.

Not surprisingly, those in the steel industry have benefited immensely from increases in newly industrializing economies and construction markets worldwide. The weakening U.S. housing sector has not had much of an effect because it is not a major steel purchaser. The International Iron and Steel Institute said the orders steel companies have received remain strong this year, jumping nearly 50%. According to Steel Business Briefing, global prices this year for hot-rolled steel coil, a crucial product used in manufacturing and construction, climbed 66 percent.

U.S. Steel Corp. Chairman and CEO John Surma expects “the strong results to continue in the coming months.” On Tuesday, U.S. Steel Corp. shares increased more than 14% after the company reported that its second-quarter profit had more than doubled as prices were forced higher by growing demand for steel products. The company posted a rise in operations income to $954 million from $391 million, with quarterly sales reaching $6.74 billion from last year’s $4.23 billion.

On Wednesday, the world’s leading steel producer, ArcelorMittal reported a nearly 115% increase (to $5.84 billion) in net income for the second quarter over last year’s $2.72 billion. Shares in the company jumped 8.2% to close at $89.90. CEO Lakshmi Mittal expects third quarter profits to show further increases in Asia, Africa and the former Soviet Union, which will offset declines in ArcelorMittal’s European flat-steel business. “In contracts which have been renegotiated and closed,” says Aditya Mittal, the company’s CFO, “we have achieved significant increases and we expect that trend to continue until the end of the year and in 2009.”