Experts slug it out over London Times piece on shorting of Rio Tinto and the sector’s ‘collapse’.
Shorting of shares, if not in an unusually large volume, will not lead to pressing of the panic button. But why did then a columnist with the London Times take special note of shorting of Rio Tinto shares in particular, and of other miners in general? More importantly, the columnist sees in the move of investors their anticipation of the market for iron ore and steel ‘collapsing’ in the second half of 2010.
As is to be expected, the loaded Times piece has created a storm in a tea cup. A leading Japanese investment bank not only immediately contested the proposition that Rio shares would collapse in the second half, but it went on to say that Rio, in spite of its very large exposure to iron ore, would much appreciate in the remaining months of the year.
The Times columnist’s thesis is based on the premise that the principal steel-using sectors, such as auto and construction, have not recovered enough, in spite of improvements noticed in the past three quarters, to justify the kind of price rises seen in iron ore, coking coal and steel so far this year.
What, no doubt, is setting off speculation of an impending pull back in what has been a weak bull run in steel since the final quarter of 2009 is the buyer resistance to the last posting of higher prices for flat steel used by auto and white goods makers, followed by some major price corrections in the past few weeks.
Even while steel recovered quite a bit of the ground lost after the world got enveloped in a deep recession since the third quarter of 2007, the April 2010 metal prices — the inflection point where buyer resistance surfaced — remained $300 to $400 a tonne below the highs of the last commodity boom.
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The Times columnist finds support in the London-based brokerage firm Olivetree Securities, which says with “auto weakening and construction activity still poor... the risk is that the recently started capacity will lead to fast growing inventories at producers. The situation may turn even worse should China experience weaker growth rates as government assistance is reduced.” According to the London-headquartered research house ISSSB, the world crude steel production in the first three months to March 2010 at 342.4 million tonnes was 29 per cent higher year-on-year.
Significantly, all regions have participated in the growth. The first quarter saw Indian production rising 13 per cent to 16.3 million tonnes, while China’s advanced by 24.5 per cent to 158 million tonnes. All this confirms that steel producers, particularly in the high-cost regions, are once again bringing into play capacity rested earlier when the world was busy coping with the recession.
The issue now is as the world goes forward, will the April prediction by the World Steel Association (WSA) that the apparent steel use this year would rise 10.7 per cent to 1.241 billion tonnes hold good? It will be recalled that steel use fell 6.7 per cent in 2009. In the unlikely event of the WSA forecast materialising, the 2010 world steel demand will top the pre-crisis level of 2007.
The WSA economics committee, however, met ahead of settling first coal and then iron ore prices on a quarterly basis, burying the 40-year-old yearly benchmark pricing. Steep rise in prices of raw materials and then moving the future quarterly prices closer to spot prices will require of steel makers to cope with some new challenges, most importantly to make users of steel products to accept new deals entailing more frequent price revisions. Auto makers and construction companies will, however, not easily relent to quarterly steel prices arrangement.
In fact, all this and also the non-abatement of the risk of a double-dip recession, even after the announcement of a huge rescue fund and central bank help for beleaguered governments in Euro zone as propounded by Yale professor of economics and finance, have played a role in value erosion of shares of the world’s leading steel companies and also the ones in India in recent sessions. If steel makers are not able to pass on the incremental cost spelt by high raw materials bills, then the less-efficient and high-cost mills will once again be rested. That to go by the Times article will see raw materials prices collapsing.