Monday, September 1, 2008
Miners Seek to Cash In On Steel Industry Demand - WSJ
One remarkable feature of capitalism is the seperation of supply chain, with the division of a service or production into the hands of multiple companies, enabling companies to develope their expertise and increase overall production. Now the pendulum is swinging back to vertical integration. Miners and Stealmakers encroached into the turf of each other in pursuit of larger profits. The phenonum is more evident in Brazil... Rising Prices Prompt Start-to-End Plans; Brazil Draws Deals By ROBERT GUY MATTHEWSSeptember 2, 2008 The global scramble for raw materials is changing the shape of the world's steel industry: Iron-ore miners are becoming steelmakers, and steelmakers are becoming ore miners. In an effort to gain independence from the mining giants that control the world's iron ore and have raised prices more than 80% this year alone, a growing number of steelmakers are shopping for their own iron-ore mines. Meanwhile, several ore miners are seeking to cash in more directly on the world's growing demand for steel. "The main difference between now and, say, 10 years ago is that there is no excess capacity in the market," says John Anton, a steel economist for Global Insight, an economic consulting company based in Waltham, Mass. "For one company to get what it needs, it now has to outbid another company." The trend toward controlling production from the raw materials to finished product, known as vertical integration, harks back to the way the steel industry operated decades ago, when it was common for steelmakers to own their own mines. In the U.S., the practice fell by the wayside in the face of competition from foreign steelmakers. The thinking was that the best way to fend off competition from abroad was to focus on steelmaking, which historically was more profitable than mining iron ore. The swing back toward vertical integration is most evident in Brazil, which has vast reserves of iron ore that remain either untapped or up for grabs. "Brazil is the strategic place for the steel industry," says Lakshmi Mittal, the chief executive of Luxembourg-based ArcelorMittal, the world's largest steelmaker by production. "It has the raw materials. It has the market. It has the growth." In the past month, steelmakers and miners have announced major investments in Brazil's fast-growing economy. ArcelorMittal said it would pay $810 million for the Brazilian iron-ore assets of Oslo-listed London Mining PLC and agreed to develop a port facility to ship iron ore, while a consortium of Japanese steelmakers joined the bidding fray for a collection of Brazilian mines owned by Cia. Siderúrgica Nacional. Also interested in those CSN mines are steelmakers from China, India and Russia. Meanwhile, Brazil's Cia. Vale do Rio Doce, the world's largest iron-ore miner by volume, said last month that it planned to build a $5 billion steel complex. The mill, to be completed by 2013, would have about 2.5 million tons of capacity, with most of the output targeted for domestic use. Several other smaller iron-ore producers have indicated they also want to move into steel production. Like many miners, Vale is flush with cash from historically high iron-ore prices and has been looking for new ways to deploy this capital. Vale has said it also wants to buy other mining operations as it moves to diversify away from iron ore. But even with $14 billion earmarked for that purpose, the company hasn't had success in buying other mining operations. For instance, Vale's proposed deal to buy smaller metals miner Xstrata PLC fell through this year over price negotiations. In addition to the steel complex, Vale announced last month that it was building an aluminum plant in Brazil so it could feed that new plant with the bauxite from its mines. It is also investing in joint ventures with steelmakers. In April, the miner signed a memorandum of understanding with JFE Steel Corp., a large Japanese steelmaker, and Dongkuk Steel Mill Co., a South Korean-based mill, to construct a steel-slab plant in Brazil. A Vale spokesman said that the company's mission is to enter into joint ventures with steelmakers to build in Brazil and increase the production of steel there. Those joint ventures would naturally purchase their iron-ore needs from Vale. Steelmakers have focused on Brazil in part because Australia's iron-ore reserves are controlled by BHP Billiton and Rio Tinto, meaning there are almost no opportunities for a newcomer to gain a foothold in the market. Moreover, Australia's logistics and transportation system is nearly at capacity and labor costs are higher.