Institutions and Competition

Iron ore and steel. Strategic, volatile and primed for conflict

March 2, 2015
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Smarter “Smokestack Industries” are essential to the future.

Considered to be developing economies in the “global governance” set-up, Russia and the BRICS know that traditional mainstream media and online propaganda vehicles driven by the “PR is the new journalism” mindset dismiss the reality that iron ore and steel are essential to the future. This means the assignment of a low importance level to the posit that the basic infrastructure of the global economy-- automobiles, trucks, farm equipment, commercial shipbuilding and defense industries-- all depend on iron and steel.

 

Meanwhile LinkedIn and other social business platforms evangelize the apocrypha that battery powered automobiles made predominantly from high tech plastics spell the end for “smokestack industries.”

 

Electric car icon Elon Musk is put on a pedestal in the Pantheon of globalism far above Lakshmi Mittal of Arcelor Mittal Steel, and Mario Longhi of U.S. Steel for example.

 

As a result, continuous improvement in developing smarter mining and steel producing processes continue to go underreported outside the rarefied world of industry newsletters or magazines affordable to only the few.

 

If these modernizations do break out into the “news cycle” they are often buzzed up by “sustainability” officers for companies that like to show a “green profile” to their shareholders, watchdogs, whistle blowers and NGOs who say the improvements are not good enough for their seemingly higher ethical and moral standards.

 

This “mashup” of information degenerates into storytelling and “data science” (the “fake science” that promotes negative bias toward iron ore and steel, big oil and the chemical industry) sometimes with good reason, sometimes without.

 

All of this noise (the Germans have the best word for it krach) is a consequence of job creation. In two decades jobs requiring other attitudes and skillsets will be created for younger generations. By that time Vladimir Putin, Barack Obama, Bill and Hillary Clinton, Tony Blair and Prince Bandar will be as old or older than Warren Buffet, George Soros and Raul and Fidel Castro, who unless they plan to make the Guinness Book of Records, will have passed on.

 

Iron Ore and Steel Logistics. A history of price volatility and conflict.

As it stands, BRICS nations dominate the world of basic iron ore and steel production by sheer volume. They have great influence over the costs of logistics. Russia, while not the top dog, is an important part of that mix.

 

But the large volumes presented by available open source statistics on the BRICS are reminiscent of the Glasnost days of Mikhail Gorbachev and the impending collapse of the USSR command economy. You can't be competitive producing, an award winning volume of, for example, porcelain dinner plates by kilo weight when the rest of the world is measuring the items by units. This is the situation with bulk iron ore and simple steel production.

 

Devaluation of the ruble is increasing demand for Russian ore and steel, notably at the expense of producers in India.

 

Meanwhile state and parastatal companies based in China and Hong Kong use clever methods to dominate world iron ore and crude steel production and their logistics. To assume that Chinese executives do not discuss price and logistics issues with their Russian, Japanese and South Korean and Indian neighbors on an occasional back channel basis would be a mistake.

 

The BRICS, a weak alliance fostered by “global governance”.

The risks and rewards in iron ore and steel are in the hundreds of billions of dollars and do not include the trillions of dollars in revenues generated by industries that use their products to produce automobiles and trucks and buses, farm equipment, ships, commercial aircraft and defense items.

 

Now as a simple, non scientific observation, these numbers dwarf the $100 million that the BRICS are investing in their much publicized Development Bank. Unlike the nascent BRICS bureaucracy, iron ore and steel are market driven commodities and require agile institutions which the BRICS have not imbedded in their business culture.

 

This suggests that, unlike NATO, which remains a world military and economic power, the BRICS are destined to remain a micro, rather than a macro alliance.

 

Looking at the statistics below, the BRICS appear to dominate the world's basic iron ore and basic steel producers.

 

Top 10 Iron Ore Producing Nations

1 China

2 Australia

3 Brazil

4 India

5 Russia

6 Ukraine

7 South Africa

8 USA

9 Kazakhstan

10 Iran

 

Top Steel Producers 2013 in millions of crude tons

Arcelor Mittal Luxembourg 96 million tons

Nippon Steel-Sumitomo Japan 50.1

Hebei Group China 45.8

Bao Steel Group China 43.9

Wuhan Steel Group China 39.3

Posco S.Korea 38.4

Shagang Group China 35.1

Ansteel Group China 33.7

Shougang China 31.5

JFE Japan 31.2

 

But the 15 largest globalized steel companies valued in Euros, which includes manufacturers of high grade, value added specialty steels, offers a different picture. This requiresBRICS to work together as an oligopoly steel cartel, like OPEC does with oil, which they are not doing. This hampers their capacity to approach the revenue generating power of the major traditional steel powers.

 

Largest Steel Companies (in billions of Euros) from January through October 2013

1 Arcelor Mittal Lux. 56.8 billion

2 Nippon Sumitomo Japan 36.3

3 Posco S.Korea 32.9

4 JFF Japan 20.0

5 Tata India 17.5

6 Bao China 15.8

7 Nucor USA 14.3

8 Gerdau Brasil 13.9

9 U.S. Steel USA 13.1

10 Thyssen-Krupp Ger. 11.5

11 VoestAlpine Austria 11.2

12 Evraz Russia 9.4

13 Severstal Russia 9.0

14 China Steel Taiwan 8.5

15 NLMK Russia 8.2

 

Total in October 2013 Euros = 278.4 billion

Total in October 2013 US dollars = $379.73 billion

Total today based on Euro-Dollar rate = $311.8 billion

note: these rates calculated from x-rate dot com charts

 

The three largest Russian steel companies, Evraz, Severstal, and NLMK, collectively, generated $36.28 billion (26.6 Euros) for the first 10 months of 2013 (based on latest available statistics at October 2013 exchange rate). That puts Russia at the #5 position after Luxembourg's Arcelor-Mittal, Japan's Nippon Sumitomo, South Korea's Posco and the two major American steel producers, Nucor and U.S. Steel.

 

The two major American producers generated $37.4 billion (27 billion Euros) in revenue from steel during the first 10 months of 2013. Other BRICS, Brazil, China and India, each generated roughly half that amount. Draw your own conclusions, regardless whether they are driven by emotions or realpolitik;)

Reminder: once again, if you find more current, or more accurate statistics, feel free to post them (or a link) in the comments section of this blog.

 

 

Logistical warfare. The Nicaragua Canal. Phantom or Reality?

At this writing Hong Kong based Hutchinson Whampoa, through operator Panama Ports, is making a $7 billion upgrade to the Panama Canal to eventually handle very large crude oil carriers (VLCC). But it still won't be able to handle the larger draft ultra large crude carriers (ULCC).

 

The proposed wider canal linking the Gulf of Mexico with the Pacific Ocean via Nicaragua is being designed to handle the ULCCs, and the equally large Valemax ore carriers.

 

If the new canal eventually goes into operation it would mean a radical change for global logistics and the military and contractor strategies that provide security for shipping everywhere.

 

With an estimated cost of $50 billion, the project, according to Reuters, is being financed by Hong Kong-based HK Nicaragua Canal Development Investment Co Ltd (HKND Group). The company is led by Wang Jing, a powerful player in China's telecommunications sector who has close ties with the leadership in Beijing. If construction actually starts this calendar year, it could be operational in 2021.

 

If that happens it will exacerbate tensions among the BRICS and the major iron ore and steel powers. This means the United States, Japan, South Korea and the European Union will be en garde over the security of new shipping lanes and those that already exist. This will result in more defense spending, which means continued reliance on iron and steel. Meanwhile, strong defense establishments and the internal security agendas and intelligence gathering that is associated with them are necessary for the preservation of the current fiat money set-up.

 

While predictive scenarios exist and continue to change there is no telling what OPEC and other oil powers will do to in this situation to further their own agendas connected with overall logistics and the politics of mediating or turning a blind eye to global extremism.

 

The essay posted here represents the personal views of this blogger on the current status of the globalization of iron ore and steel markets and their logistics.

 

In closing, should posturing and sabre rattling escalate unfortunate military and non-military incidents can't be ruled out.

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