Posts Tagged ‘steel’

Chinese steel market warms up, Vale is perfectly placed

valeCompanhia Vale do Rio Doce (Vale) has recently been climbing back from lows caused by the severe drop in demand for its principle feedstock, iron ore. However, there are signs that the Brazilian mining giant may be turning the corner, as the Baltic Dry Index (BDI) has begun to show some activity off the back of speculation that the steel industry is picking up, particularly in Asia.

Vale said steel output across Asia declined by only 8.9% in the first quarter, despite the Japanese recession. This would indicate continuing strength in Chinese demand, compared to North American steel output falling by 52% & European output declining by 44%. Furthermore, Vale said its first-quarter copper output was unchanged year-on-year, aided by Chinese consumer demand for durable goods.

Steel demand is set to stabilize in the latter part of 2009, leading to “mild” recovery in 2010, according to the World Steel Association. German car registrations in March rose to the highest since 1992 after the government began paying owners to trade in old vehicles for new models. Sales in China of cars, minivans and multipurpose vehicles rose to a record in April. Car makers are the fourth-biggest steel consuming indutry, according to the association.

“The first-half will be pretty poor, but by the third or fourth quarter demand will improve,” said Peter Fish an analyst at UK based metals consulting company MEPS International Ltd. “The time is approaching when so-called destocking, in which customers use up inventories, ends and new orders will be made”

China’s imports of iron ore also spiked dramatically in February & March,  as larger iron ore producers such as Vale & Rio Tinto have been selling their iron ore to Chinese customers at a discount. Based on comments from the China Iron & Steel Association, it’s possible that small Chinese steel mills are taking advantage of the opportunity to buy higher-grade imported ore at attractive prices. Previously, imported ore was only available to large mills.

A recent report in Tradewinds shows that Vale chartered 25 Capesize vessels last month for chinese delivery, which should point to flows of iron ore resuming, although a base price for 2009 has still not been agreed with Chinese steelmakers. At present, iron ore is being sold on the spot market at roughly 20-40% discount from 2008 highs of $200 per tonne, by Rio Tinto & BHP Billiton. Valke on the other hand has dropped production & delivery in step with falling demand & has maintained last years benchmark pricing.

Chinese negotiators from Bao Steel had tried to force prices down to 60% of last years benchmark, however it would seem that Vale’s stance regards shipment may have forced China’s hand, as demand for steel is growing. Vale (NYSE : VALE) finished trading on Friday at  $17.42 off of a YTD low of $11.90 on heavier than norma buying activity.

For me Vale is in a much more enviable position than its two main competitors, Rio Tinto & BHP, as they have expended a lot of energy in last years failed takeover bid. Rio Tinto in particular is saddled with huge amounts of debt & no doubt is coming under a lot of political pressure form its would be Chinese bail out “sugar daddy”. I firmly belive that Vale will be able to add at least 50% to its stock price this year & is one of the best value buys in the commodities sector right now.

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Ups & downs in Vietnam

images155628_2nam2009 can be considered as a  special year for Vietnam & it’s economy as the country has now belonged to the World Trade Organisation (WTO) for two years, facing both opportunities for growth along with internal challenges & heralding a sea change as Vietnams markets are now open to foreign companies as never before. Foreign investors now have the opportunity to enter into Vietnam’s domestic markets & enjoy fairer treatment under law, service sectors such as banking & consumer retail are prime targets for 2009.

Vietnam attracted 1,171 new foreign direct investment (FDI) projects with a total registered capital of more than $60.2 Bn in 2008, tripling last year’s figure, according to the Foreign Investment Agency under the Ministry of Planning and Investment. Demonstrating that Vietnam remains attractive destination for foreign investors, Taiwan being the leader, with an estimated $19.6 Bn flowing into the fledgling tiger last year alone. Malayias & Korea both recently made hefty investments in gaining operational licences for retail operations in Shinhan Vietnam Bank & Hong Leong Vietnam Bank respectively. The SE Asian nation has one of the regions largest domestic market potentials, currently Vietnam is the worlds 13th most populous country, with a population of 82.6M, making it an attractive prospect for both domestic & foreign firms as the population achieves  financial liquidity.

India’s Tata Steel is committed to investing $5Bn in a new steel production plant having entered into a joint venture with Vietnam Steel Corporation and Vietnam Cement Industries for building the integrated steel mill in the Ha Tinh province. For the plant, the company requires 1,300 hectares of land. However bureaucratic holdups & intense competition for land rights have seen the projects first phase being pushed back to 2011. The Indian steel giant, through its wholly-owned subsidiary in Singapore, Tata Steel Global Holding Pte Ltd, will hold a 65 % stake in the joint venture, whilst also extending an equity holding of 30 per cent in Thach Khe Iron Ore mining project in Vietnam, allowing it to become the countrys first integrated steel maker. Korean competitor POSCO already has made investments of $1.2Bn project for building two rolling mills in the Phu My Industrial Park in Ba Ria-Vung Tau province near Ho Chi Minh City. The company is also building a private harbor on the site  to support the two plants and is carrying out feasibility studies for a stainless steel plant and an integrated steel mill in Vietnam.

Meanwhile, domestic steel firms are also booming, helped by a recent tarriff increase on imported steel billet and steel ingot, which was introduced in early December 2008.  According to the Vietnamese Ministry of Finance, “the adjustment of steel import tariffs is necessary to boost the domestic steel consumption and to ensure the stability of the country’s steel market as the current stockpiled steel in companies and manufacturers nationwide has reached  around 3 million tons.”

Thep Viet Steel Corp recently revealed plans to invest in Cambodia, it currently exports 5,000 tonnes of steel per month to Cambodia, which is reported to have large iron deposits, and Vietnamese companies have been granted concessions to explore for the mineral – a major feedstock for steel production. “Iron ore will be a big source of income if the country is able to utilise this natural resource,” CEO Tann Kin Vin said. Prime Minister Hun Sen last year called on foreign investment to take advantage of Cambodia’s iron resources.

In a similar story to Indonesia, Vietnam, which is the regions third largest oil producer,  enjoyed a boom year in 2008, mainly due to the large increases in commodity & oil prices, which saw The Vietnam National Oil and Gas Group, PetroVietnam (PVN), earn  total revenue of about $16.5 Bn in 2008. An increase of 31% over 2007. PVN contributed about $7.1Bn  to the state,  accounting for over 30% of the total state budget revenue.  However, due to lack of refining capacity, Vietnam imports most of its refined oil products. The company is seeking to gain supplies of up to 26.5 million tons of crude per annum in order to supply three proposed refineries in an effort to satisfy domestic demand.

“The company is willing to offer stakes in the refineries in exchange for long term crude contracts”, Tran Ngoc Canh, CEOP of PVN told reporters at the Gasex conference last year, “PVN could offer as much as 30% in each refinery under Vietnam law & more in special cases.” 

Late December, it appears that a “special case” has come to fruition, when PVN announced that it would give up to 49% equity in the Dung Quat oil refinery in exchange for prefernetial crude contracts. The $2.5-billion refinery, located in central Vietnam, has a designed capacity to process 130,000 barrels of crude oil a day and will be able to meet 30% of the country’s demand for petroleum products.In a seperate announcement PVN confirmed that BP will be signing a supply contract to provide up to 50% of the refinery requirements for the plant this week.

PetroVietnam is counting on new exploration projects to boost crude production as the ageing Bach Ho field has shown declining output for the last four years. Projects are currently underway on blocks such as Ca Ngu Vang, Phuong Dong & Si Va Tang alomg with further efforts in the South China Sea around the Spratly Islands. The Spratly project involves an international tangle, as both neighbours China & Malaysia claim sovereign rights in the area. Last year, China forced Exxon Mobil to cease exploration in the area, whilst BP pulled out of a JV with PVN in 2007, citing regional instability.

Meanwhile, PVN is eyeing overseas opportunities for investment & development, the country has interests in 16 foreign oil & gas projects, with 6 in Asia, 4 in Africa & the rest in America. In a joint venture with the Venezuelan Petroleum Corporation (CVP), Vietnam will look to invest $11.4Bn in a project to exploit and refine heavy oil in the Orinoco heavy oil belt in Venezuela. Once operational, the project will turn out up to 200,000 barrels a day, equivalent to 10 million tonnes of oil per year, oil pumped up by the JV will be refined on site into light oil by its own refining plant.

Also, following China National Patroleum Company – CNPC’s recent success in signing a reputed $3Bn contract with Iraq on the Ahdab oilfield, Vietnam is holding talks with the Iraqi oil ministry in attempts to revive a contract signed under the leadership of Saddam Hussein. PVN originally signed a deal with Iraq in 2002 to develop the Amra oilfield, with an estimated output of 80,000 barrels per day. The original deal was never implemented due to United Nations sanctions that followed Iraqs 1990 invasion of Kuwait.

According to Jason GW over at Frontier Markets in his recent, Dong losing its Ding , “the government estimates that the economy will grow by as much as 6.5% in 2009. But an IMF report last week forecasted growth of just 5%. Additionally, a report by Vietnam’s Bank for Investment and Development released this week concluded that the country would likely show a trade deficit of about $7 billion next year, which would lead the dong to fall 3.5 to 5% against the dollar.”

This is all very promising, however, from a personal point of view, concerns still remain regards the tangle of bureacracy that may overshadow the new “open” face of Vietnam for foreign companies & investors. Reports in local media complain that continued over investment in State owned enterprises (as much as 50% of the annual budget) stifle entrepeneurial efforts. Small & medium sized companies are still finding it difficult to access long term loans in order to expand inflation, due to government efforts in curbing inflation. So mixed messages in my opinion, but progress is progress, however slow, I can only hope that investments continue to flow in order to help the economy grow & stabilise in the near term. In addition to these shortcomings, there remain some limitations in Vietnam’s economy this year such as corruption, quality control and allocation of human resources. The World Bank’s report on December 10, 2008 stated that Vietnam’s economy will recover in 2009. Without these issues being aggressively tackled, I fear the flow & recovery may dry up.


China stocks up on energy & raw materials while prices are depressed

001320d123b90949ce3308 China has embarked on an ambitious spending spree in order to help stave off recessionary pressures & attempt to maintain a growth target of  8% in 2009. Following on from its massive $585M stimulus package, announced in early November, news of deals in energy & metals has been flowing over the last week. When the stimulus package was originally announced, we heard this from our friends at RBS :

“Whats important here is just how quickly that money hits the street,” said Ben Simfendorfer, chief China economist for Royal Bank of Scotland, speaking on CNBC

Well it would seem not to have taken too long, as we have news that apart from pulling forward the long anticipated 3G rollout, as reported on MyStockVoice in an earlier post, China is beginning to stockpile oil & gas via imports whilst building an inventory of  aluminium & other metals from domestic producers.

Zhang Guobao, the head of the National Energy Administration, said in remarks published on Monday that China would actively push forward the construction of the second phase of state strategic oil reserves after having largely completed the first phase. China has completed the planning of the second phase of government storage facilities that would be able to hold up to 26.8 million cubic metres of oil, or some 170 million barrels, but has not disclosed whether construction has begun. Nor has the government disclosed if the tank farms set up in four locations in the first phase, with total capacity of some 102 million barrels, have been fully filled.

The world’s second-largest oil user will also take advantage of opportunities resulting from the financial crisis and weak energy market to expand energy cooperation with neighboring countries and major energy producers, Zhang said.

State controlled Sinopec (NYSE – SNP) recently completed the construction of oil storage tanks with a capacity of 3.8 million cubic metres in the coastal province of Zhejiang & has also announced a mutual supply agreement with fellow oil giant CNPC  . Similarly, rival PetroChina (NYSE – PTR) has begun to fill a new facility of 1 million cubic metres in the northwestern Xinjiang region in partnership with Kazakhstani oil firm KazMunay. Zhang also confirmed that China will push forward the construction of the proposed China-Myanmar oil and gas pipelines while also proceeding with the China-Central Asia gas pipes and the second phase of the China-Kazakh oil lines.

Meanwhile, counterparts at the State Reserve Bureau (SRB), have announced that will buy 300,000 tons of aluminum at 12,300 yuan (about $1,750) per ton in January 2009 to push up prices and support producers, as reported by Rednet. China’s aluminium producers, like their competitors worldwide and their peers in other base metals, have been forced to shut down some production to cope with the impact of the global economic crisis, which has crippled demand. 

“Aluminium prices were encouraged on the reserve purchase news,” said analyst Jia Zheng at Southwest Futures. “The decided purchase volume seems to be lower than expected but we are looking forward to more movement by the reserve bureau.”

 

Chinese officials have said they plan to buy up resources and materials to support producers, who are smarting from prices that have fallen below the cost of production, rumours abound that this buy up on aluminium could reach a total of 1 million tons by April 2009. The major recipient for this windfall will be state controlled Chinalco subsidiary Chalco (NYSE – ACH), who is reported to be receiving 50% of the order, whilst the remainder will be shared by seven regional producers.

 On the same day as the SRB announced the procurement plan, Bao Steel Group, China’s top steel maker, raised its February steel prices by 100 yuan/ton to 300 yuan/ton, this is widely believed to be in response to a previous SRB announcement that  another 3 trillion yuan ($400M)would be set aside for railway infrastructure construction projects and post-quake reconstruction efforts, the investments are expected to increase steel demand by 200 million tons in 2009. This could also be potential good news for other steel majors, particularly Mittal Steel (NYSE – MT), which acquired a 37% stake in government owned  Hunan Valin, Mittal  already has a $100 million steel plant under construction in the northeast China port city of Yingkou, Liaoning province.

Update 1 (30/12/08) : Myanmar signs gas deal with SKorea, India, China as reported in The Times of India

Military-run Myanmar has signed a deal with South Korean and Indian companies to pipe natural gas from the energy-rich nation’s offshore fields to China, state media reported Monday.

“The agreement was signed to export natural gas to China from Shwe natural gas project at Block A-1 and A-3 at Rakhine coastal region through pipelines,” the New Light of Myanmar newspaper said. The paper gave no other details of the project, but Beijing media reported last month that China was planning to start construction on a gas pipeline to Myanmar in early 2009.