“In terms of its economic and geopolitical impact, what is happening in Asia today is probably most akin to the Industrial Revolution, when the world’s leading economies replaced manual labor with mass-scale manufacture of machinery, railways began to criss-cross the continents, the steam engine revolutionized the world, and later, skyscrapers first poked at the skies. And, as in the Industrial Revolution, there’s one major resource that stands out as critical: Iron ore. Without iron ore, steel cannot be made; without steel, virtually all the new infrastructure and construction would be impossible,” says Martin Weiss, Ph.D.
China is the largest steel producer on the planet. In 2006, China produced 420 million metric tonnes of steel. Given the current growth rates of steel production, the chances of anyone overtaking China in our lifetime is remote: Last year, for example, steel production in China soared 18%; while the U.S. steel industry was fortunate to grow by 6%.
China’s steel exports have multiplied seven fold in just three years. In addition to being the largest producer, it’s also the largest steel exporter in the world. It’s a heavy-weight in virtually every steel product category — long products, flat products, tubes, and in almost every market — Asia, Europe, North America and South America.
Just as China has emerged as the world’s steel-producing king, it has also become the world’s iron-ore glutton. China needs the iron ore to make steel for its construction industry, now the largest in the world. It needs the ore to build residences, highways, railroads, subways and dams.
Result: Just in the first three months of this year, China imported 100.2 million tonnes of iron ore, an increase of 23.4% over the previous year. And if this pace continues through year-end, total imports for 2007 will easily exceed 355 million tonnes.
Looking over to India and into the future, the demand could be even larger. Right now, India’s consumption of steel is still less than 90 lbs. per person. In China, by contrast, it’s over 500 lbs., and in South Korea it’s about 2000 lbs., or over 20 times more than India’s.
China is locking down iron-rich resources in Australia, where China’s Baosteel and Australia’s Fortescue Metals Group Ltd. (FMG) have signed one of the largest partnership deals in Australian mining history. It is seeking to do something similar in Canada, Brazil, and wherever iron ore is found. This, in turn, is setting off a chain reaction of iron ore deals that China is not directly a part of.
In Colombia, Brazil’s Votorantim recently bought 52% of Acerãas de Paz del Rão, Colombia’s second biggest steel maker. This means Votarantim now surpasses the giant Arcelor Mittal, as well as Brazil’s own Gerdau and Companhia Siderurgica Nacional.
Brazil’s Companhia Vale do Rio Doce (RIO) is the largest mining and metals company in the Americas and the second largest in the world. It’s the world’s largest producer and exporter of iron ore and pellets; the second largest producer of nickel, manganese and ferroalloys; and one of the lowest-cost integrated producers of aluminum and copper. And recently, it has established a strategic alliance with Nippon Steel, one of the world’s largest metal groups, to produce iron pellets and iron alloys.
Meanwhile, BHP Billiton is the only non-banking firm among Australia’s five largest. Compared to RIO, its closeness to China and Asia is a minor strategic advantage; the greater volatility of its shares, a minor disadvantage. But overall, the opportunity is similar.
“Don’t rush out to buy iron ore companies immediately. Wait for a pullback. First look at the globe from a broad, sweeping perspective. Only then can you start to narrow your focus and your choices,” explains Dr. Weiss.
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