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Mills are importing more ore

Mills are importing more ore
A rebound in steel production in China has mills importing more ore, but shippers' stocks remain depressed.

A rebound in steel production in China has mills importing more ore, but shippers' stocks remain depressed.

A rebound in steel production in China has mills importing more ore, but shippers' stocks remain depressed. A rebound in iron ore imports to China has floated dry bulk shippers off the rocks. Spot market charter rates for capesize vessels--the largest dry bulk ships, which often handle coal and ore--cratered to about $2,000 a day in November, as the global financial crisis deflated Western consumer demand for Chinese goods. Day rates started to pick up in December, after China announced a half-trillion-dollar stimulus plan, rising to $90,000 in May, and settling at $60,000 on Tuesday.

"There has been a huge improvement, well above cash costs for this industry," says Oppenheimer analyst Scott Burk. Most capesize vessels break even at $15,000 a day.

Steel production is booming again in China, driven by the country's $586 billion stimulus package. Much of that steel is being made from imported iron ore since many of the country's high-cost ore mines have been shuttered.

As domestic mines slowly ramp back up, dry bulk shippers have been reaping a windfall in revenue, feeding the beast with ore from Brazil, India and Australia. China is the largest importer of iron ore in the world, taking up half the market last year, and it's poised to hit 70% of the market in 2009.

Monthly shipments to China fell off dramatically at the end of 2008, but by spring had climbed past the first half of 2008"s monthly average of 40 million tons. Imports in May were 57 million tons; in June, 55 million. Despite some 15 million tons more a month in imports, Burk and other analysts say China's iron ore inventory from imports has remained relatively flat in recent months. Until recently, iron ore imports were some $25 a ton off the marginal cost to mine it in China, which is about $80 a ton.

That gap has collapsed. Spot prices for iron ore in China this week are about $85.

Chinese steel production in June hit record levels

Meanwhile, Chinese steel production in June hit record levels, 49.42 million tons, with increasing reliance on domestic ore. Analysts have estimated that anywhere from a fifth to half of Chinese ore mines have been closed in 2009.

"The supply-demand balance for the medium term has deteriorated from what it was a couple months ago," Burk says of dry bulk shippers. "Our view is that puts rates back down in the $30,000-a-day-range ... but even at $30,000 a day, our models show that stocks are still undervalued by as much as 70% or 80%."

That includes companies like DryShips, Eagle Bulk Shipping, Excel Maritime Carriers and Ocean Freight. Oppenheimer has "buy" ratings on three dry bulk shippers: Genco Shipping and Trading, which has the most exposure to spot capesize day rates, Diana Shipping and Euroseas.

Houston-based investment firm Jefferies & Co. said in a recent report that it expects dry bulk shipping rates to remain firm through the first quarter of 2010, based on continued demand in China for imported iron ore, as well as expectations that Japan, South Korea and the European Union will likely boost steel production in the second half of the year, and added demand in the fall for U.S. grain.

Dry bulk shipping demand has increased more dramatically than anticipated.

Higher shipping rates, meanwhile, could draw added capacity to the 7,000 vessels that make up the current global dry-bulk shipping fleet, of which 870 are the big capesize units. Eyes will be on that detail and, of course, hungry China.


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