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The year ahead in metal raw materials

Keywords: Tags  iron ore, metallurgical coal, 2013 outlook, Peter Kakela, Michigan State University, Cliffs Natural Resources Inc., Bill Beck

Even though demand for iron ore and metallurgical coal has been sluggish recently, U.S. producers predict that 2013 will be a solid year for the raw materials that provide the feedstock for North America’s steel mills.

Minnesota’s taconite producers, which supply the iron pellets that fuel many of the blast furnaces on the lower Great Lakes, produced an estimated 40 million tons last year, according to the state’s department of revenue, the highest tonnage since 2005.

Production should remain stable this year, according to Peter Kakela, professor of resource development at Michigan State University in East Lansing, Mich. “The U.S. economy is edging up from the recession,” he said.

Stronger North American vehicle sales are a major reason for his rosy outlook for iron and steel. Car and light truck sales exceeded 14.5 million in 2012, up from 12.8 million in 2011, and analysts expect sales to top 15 million in 2013.

Kakela conceded that the North American steel industry has entered a period in which it must rationalize production with sales. In November, Cleveland-based Cliffs Natural Resources Inc. announced a plan to idle two of the four lines at its Northshore, Minn., operations in 2013.

But other producers are adding capacity. Grand Rapids, Minn.-based Magnetation Inc. announced in December that it would open a facility in central Indiana to process iron concentrate from Minnesota tailings piles, and Pohang, South Korea-based steelmaker Posco Ltd. announced this year that it was joining Kaohsiung, Taiwan-based China Steel Corp. in paying $1.1 billion for a 15-percent stake in Luxembourg-based ArcelorMittal SA’s Labrador Trough iron ore mining facilities.

The veritable explosion of natural gas reserves in North America has encouraged the expansion of direct-reduced and hot-briquetted iron ore production facilities, creating a product that will compete with prime grades of ferrous scrap for feedstock in electric-arc furnaces. Charlotte, N.C.-based Nucor Corp. expects to begin producing direct-reduced iron (DRI) at its new 2.5-million-ton-per-year Louisiana facility in 2013, and Fort Wayne, Ind.-based Steel Dynamics Inc.’s 500,000-ton-per-year Mesabi Nugget project in Minnesota also is scheduled to begin production of enriched iron ore this year.

Internationally, iron ore spot prices in China have reached a six-month high of nearly $150 per ton, up 70 percent since September, after falling nearly $80 over the past two years. China’s National Development and Reform Commission approved 21 projects in December, and market confidence in the world’s largest economy has been strengthened by the central bank’s monetary policies, which encourage investment spending. “China is not going away,” Kakela said.

The government of Western Australia has asked Chinese investors to consider putting up as much as $6 billion to develop a new iron ore mining reserve in that state. It would be the region’s second major iron ore development after the rich Pilbara range, which ships most of its ore to China and other Pacific Rim countries.

London-based BHP Billiton Plc estimates its Western Australia iron ore probable reserves at 2 billion tonnes, and the company said its Pilbara mineral resources have more than doubled in the past six years. The company noted that the Port Hedland inner harbor expansion is scheduled to be commissioned in 2013, and the company’s Jimblebar mining complex will be easily expanded beyond its present capacity. BHP noted that the expansion of low-cost seaborne supply will flatten the cost curve for ore shipments to China.

And Fortescue Metals Group Ltd. said work on its suspended Kings iron ore project in the Pilbara region likely will resume early this year, which should triple its production in fiscal 2013.

At Rio de Janeiro-based Vale SA, iron ore shipments in fiscal 2012 were expected to track the 311 million tons shipped in fiscal 2011. The world’s largest producer of iron ore and pellets, Vale ships nearly 40 percent of its iron ore to customers in China. And Vale is making significant investments in mining infrastructure to meet that need in coming years. Just one example is its Caraj‡s Serra Sul project, a 90-million-ton-per-year truckless mining complex scheduled for commercial operation in 2016.

After watching prices sink to their lowest levels since 2009, metallurgical coal producers have been buoyed in recent months by a rebound fueled by a resurgence in Chinese and Indian steelmaking. Producers spent much of last year reducing output in an attempt to stem the slide in prices. After reaching $330 per tonne in early 2011, prices dropped to near $160 per tonne in late 2012. This past fall, New York-based Goldman Sachs Group Inc. pared its metallurgical coal price forecast to $178 per tonne for 2013 and to $195 for 2014.

Bristol, Va.-based Alpha Natural Resources Inc., the third-largest metallurgical coal miner in the world, told investors at the recent Goldman Sachs global metals and mining/steel conference that it and other metallurgical coal producers in the United States, Australia and Canada cut back production by nearly 30 million tons in 2012, more than 10 percent of the seaborne market. Alpha, which has an annual capacity of 20 million to 23 million tons and reserves of 1.5 billion tons in Appalachia, said that demand from the Bric countries (Brazil, Russia, India and China) should increase dramatically to more than 300 million tons per year by 2020.

St. Louis-based Peabody Energy Inc., another major metallurgical coal producer, said that it, like Alpha Natural Resources, is optimizing production, containing costs and streamlining operations to make production as economically efficient as possible. But Peabody told analysts at the Goldman Sachs conference in late November that it expects demand for metallurgical coal to rise sharply as steel production in Bric countries ramps up to meet growing demand.

Peabody said it expects Chinese gross imports of coking coal to increase to as much as 450 million tons in 2016 from an estimated 280 million tons last year, while India’s imports should double to as much as 60 million tons from an estimated 30 million tons in the same comparison.

Finally, metallurgical coal producers may benefit this year from a December accident in Vancouver, British Columbia, that idled one of the berths at the port’s Westshore Terminals, one of the world’s largest metallurgical coal transshipment facilities.

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