Japanese trading houses set for record profits - FT.com

Japan’s trading houses are on course to deliver record profits for the current fiscal year in spite of fluctuating commodity prices.

Mitsubishi Corp – the largest of the big five trading companies – on Tuesday reported solid third- quarter earnings, and stuck with its bullish full-year net profit forecast of Y450bn ($6bn), despite lingering damage on its auto and coal businesses from last year’s floods in Thailand and Australia.

The other four trading companies – Mitsui & Co, Sumitomo Corp, Itochu and Marubeni – will report on Thursday. Analysts expect the quintet to post a combined Y1.62tn of net income in the year to March – almost a quarter of the total profit of non-financial companies in the Nikkei 225. “The others should be as good, if not better than Mitsubishi,” said Penn Bowers, a Tokyo-based analyst at CLSA.

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At Mitsubishi Corp, metals accounted for two-fifths of net profit in the first nine months, with energy just over a quarter. However, a general buoyancy in commodities meant that it made money in each of its six main segments, spanning logistics to “living essentials” such as sugar, rice and cement. Of the dozens of business divisions run by the big five, Nomura expects just two of them – real estate development at Marubeni and consumer services at Mitsui – to lose money this year.

Yet, despite projections of combined net income about 10 per cent better than the previous record in the year to March 2008, the big five are trading at the five lowest forward price to earnings multiples among non-financial companies on the Nikkei.

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However, they are yet to prove they are as good at operating assets as they are at booking profits from them, said Yasuhiro Narita, an analyst at Nomura. “You have to ask whether active investment policies will, upon implementation, lead to earnings growth.”

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Glencore and Xstrata close to $80bn merger

It seems like its finally coming!!
Glencore and Xstrata close to $80bn merger
Financial Times, 8:20am Thursday February 2nd, 2012
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By Javier Blas, Commodities Editor
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Glencore and Xstrata are in advanced talks for a nearly $80bn merger that could reshape the mining industry
Read the full article at: http://www.ft.com/cms/s/0/a672e172-4d6c-11e1-b96c-00144feabdc0.html

Forget gold, IRON ORE is the story of the decade - MINING.com

The last comment is the most telling, though...:

It’s not all good news however. New supply coming on stream from 2014 – BHP and Rio’s output plans for Pilbara alone are a staggering 750 million Mtpa and just this week BHP committed another $14 billion to expand its port – must impact prices. Rio’s chief Tom Albanese in December said he sees one more year of $120-plus iron ore – then it’s over.

Forget gold, IRON ORE is the story of the decade

On the last day of Roundup, Vancouver’s mining showcase, Sandy Chim CEO of Canada’s Century Iron Mines, flashed a few slides about China, India and the iron ore market over the last decade that would make gold bugs green with envy.
BHP, Vale and Rio Tinto control nearly 70% of the 1 billion tonne annual iron ore seaborne trade and pretty much all contract pricing depend on their say so. The price of 62% iron ore never strayed from $10 – 14/tonne for more than 20 years (1991 was a banner year – miners got all of $15.03 for their haul). The state of affairs was due to secretive negotiations and annual contracts.
Then at the end of 2004 all hell (for Chinese steelmakers that is) broke loose. The Big 3 decided enough is enough and put up the price 72%, marking the start of a supercycle and the beginning of the end of the old pricing system:

Although October last year constituted a mini-crash with spot declining from a record high of $180 to $116, on Friday it was back up above $140. Reuters reports futures prices of nearby months remained at a premium, “reflecting widespread anticipation of an improvement in spot ore prices once Chinese buyers return from the week-long break,” according to reference price provider Steel Index.
Chim points out that the dramatic rise since the beginning of 2008 were into the teeth of the financial crisis and despite prices that went up four-fold in four years, Chinese steelmakers continued to buy. China now imports 60% – 70% of its needs, up from $35%, because of low grade domestic stock from expensive underground mining. Iron ore producers also benefit from industry concentration and pricing power compared to a highly fragmented steelmaking industry.
Steel production is closely correlated to economic growth and personal incomes. Using that metric China’s citizens have to increase their personal incomes almost 10-fold to catch up with the US where GDP per capita income is $48 000. Given the firepower the Chinese government still has to stimulate the economy – the country’s reserves are more than $3 trillion and 20 times that of the US – and its ambitious infrastructure programs (among others 36 million new housing units), it still has some way to grow:

Chim also provides interesting stats for those who believe the China boom is coming to a close. There is plenty of opportunity left in the region. India is where China was 20 years ago while the other Asian economies that are doing well – Indonesia, Vietnam, Thailand, Philippines and others – constitute a 500 million population pool:

And for those who think iron ore is only an Australian story, Canada’s miners have attracted $10 billion in the past year through acquisitions, investments and expansions:

It’s not all good news however. New supply coming on stream from 2014 – BHP and Rio’s output plans for Pilbara alone are a staggering 750 million Mtpa and just this week BHP committed another $14 billion to expand its port – must impact prices. Rio’s chief Tom Albanese in December said he sees one more year of $120-plus iron ore – then it’s over.
Thanks to their economies of scale the Big 3 have been flooding the market by concentrating on building market share rather than maximizing prices. This way the giants drive high-cost producers out of the business. The Big 3 can handle a price well below $120; smaller players may become collateral damage as peak profitability in the sector passes.
Click here for MINING.com’s dedicated page for popular iron ore pricing posts.

See the whole article online here: Forget gold, IRON ORE is the story of the decade - MINING.com