It was only a few months ago that Donald R.
Lindsay, chief executive officer of Teck Cominco Ltd., was
lamenting the lack of opportunities in one segment of the
steelmaking raw materials market. Teck would love to get into
the iron ore business, he said in February, but the problem was
there were no good properties available.
That analysis stills holds true today. The
large majority of the traded iron ore market remains under the
control of the three big producers Brazil's Vale and
Anglo-Australian mining houses Rio Tinto and BHP Billiton.
Enticed by a surging spot market and the prospect of big
increases in contract prices, new entrants are rushing to bring
ore to market, but a sale isn't on anyone's agenda.
In late July, Teck unveiled its solution to
this dilemma Forget iron ore, go for coal instead. With its
$13.8-billion bid for Fording Canadian Coal Trust
(AMM, July 30), North America's biggest metallurgical
coal exporter, Teck will become a major player in this market.
When taken together with its presence in base and precious
metals and its ownership of Canadian oil sands projects, it is
looking to be one of the most diversified mining companies
Teck isn't the only North American company
turned on to the value of coking coal. Cleveland-Cliffs Inc.
bid $10 billion for Alpha Natural Resources Inc. in July
(AMM, July 16), while ArcelorMittal SA has been
snapping up smaller producers throughout the summer. Further
afield, ArcelorMittal is also battling it out with South Korean
steelmaker Posco Ltd. and a Chinese investment firm for control
of Australia's Macarthur Coal Ltd.
So why metallurgical coal, and why now?
Partly it's due to sheer necessity Coal assets are available,
for a price, while taking control of iron ore assets is an
altogether more complex proposition, as BHP Billiton is
discovering as its massive bid for Rio Tinto runs into
regulatory problems in Europe.
But coking coal producers are an attractive
target in their own right. In iron ore, the jury is out on
whether the market will remain tight or whether the new
projects that are coming online this year and next, together
with a slight but appreciable slowdown in the pace of Chinese
steel output, will finally cap the price gains of the last five
Metallurgical coal looks to be a more bullish
prospect. While it might be true that a slowdown in Asian blast
furnace production would hit demand for coking coal as much as
it would for iron ore, the metallurgical coal market has
received little of the attention-or investment dollars-that
iron ore has since the Chinese boom began. To some extent, the
market is now playing catch up Strong demand from China's mills
and a transportation crunch in Australia have combined to send
prices surging, with contract prices between Australian
producers and Japanese steelmakers more than tripling earlier
this year. North American producers are benefiting too Alpha's
net income soared to $74.3 million in the second quarter, more
than 15 times the year-earlier $4.7 million (AMM, July
Those kind of numbers are guaranteed to
attract attention. Rumors emerged in late July that
ArcelorMittal might be mulling a counterbid for Alpha, or even
for Cleveland-Cliffs itself. Meanwhile, Cliffs' largest
shareholder, privately owned hedge fund Harbinger Capital
Partners, greeted the news of the Alpha bid by pressing for
Cliffs to put itself up for sale instead.
So Lindsay's lament about the lack of iron
ore opportunities looks unlikely to be echoed in coking coal
anytime soon. New opportunities are emerging, but only those
with big wallets-and the stomach for a fight-need apply.
DAVID BROOKS, SENIOR VICE