About CBG Capital (ASX Code: CBC)
CBG Capital provides an opportunity to invest in a portfolio of Australian listed shares in companies both within and outside the S&P/ASX200, managed by Ronni Chalmers and the team at CBG Asset Management.
Offer of shares in CBG Capital ASX-listed investment company
Paradigm Securities is focussed on the Resources Sector and whilst the sector has been very difficult for some years Paradigm still considers that an upturn is not too far away. This focus has meant that Paradigm does not usually give advice on general stocks outside the Resources Sector. Paradigm is however, pleased to be able to recommend participation in a new listed investment company that holds a balanced Australian equity portfolio. It is seeking up to A$50m in an Initial Public Offering in a proposed ASX listing. CBG Capital is run by former BT Australia investment manager Ronni Chalmers who set up his own boutique funds management company, CBG Asset Management, in 2001. The company’s two funds have consistently outperformed the ASX 200 accumulation index since inception. In the latest Mercer survey the CBG Australian Equity Fund was the fifth best performing fund out of 95 fund managers. CBG Asset Management was awarded the Sky News Business Golden Calf Award in 2013 for the Best Boutique Australian Equities Manager. CBG Capital is seeking to issue up to 50 million shares at A$1.00 each and will have a 1:1 separately listed attaching A$1.00 two year (Sept 2016) option. The minimum of 16m shares has already been achieved. The fund can have up to 25% outside the ASX 200 and so has been able to select smaller growth stocks that can give additional portfolio performance. The listed fund should replicate the stocks in CBG’s existing funds and should achieve an attractive fully franked dividend yield of 4-5%. The fund offers a stable long term (5-7 years) horizon for capital growth and income within the Australian Share market. The issue closes on 20 November. Attached are links to three documents:-- Description of CBG Capital and its proposed ASX listing fund
- The CBG Capital Ltd LIC fund prospectus
- An application form to complete and send back to me at Paradigm Securities (bdawes@psec.com.au)
Corporate earnings for many companies in the US have been good and FactSheet reports for Sept Qtr 2014 that, for the 362 companies it follows, 78% have had earnings above the mean estimate and 59% had sales above the mean estimate.
EPS figures for these companies are 7.3% higher than a year ago and about 28% higher than in 2007 pre GFC.
The good US economic growth data have been above expectations and many other countries are also providing this better data.
More recent data and IMF forecasts* for 2015 paint a positive picture although much of the recent data in UK and Europe are better than IMF forecasts* and its very recent outlook downgrades.
Much has been made of the influence of a strong US$ but individual supply demand patterns are more important than just a currency adjustment.
Oil and natural gas need to be closely followed because a strong US$ won't have much of an impact on these prices.The Islamic militants in Iraq may affect oil and gas fields and also may try to intercept tankers in the major choke points such as Straits of Hormuz to give some supply problems for the West. Also US natural gas inventories are relatively low ahead of what could be another cold winter.
China Crude Steel Production was 779mt in 2013 and should be 820-830mt in 2014 and 850mt in 2015. It should peak in the mid-term of 13th Five-year Plan Period (2016-2020) in 2017 at approximately 870mt before declining to 850mt by 2020 and 800mt by 2025. Note that RIO and BHP have a longer term growth rate that takes crude steel production above 1,000mtpa.
The most recent World Steel Association data gives 821mtpa for September for China but this should slow seasonally ahead of the 2015 Spring Festival to give the 820-830mt for 2014.
To achieve this crude steel production rate, iron ore imports have been surging and are up about 15% YTD and have exceeded 1,000mtpa on a monthly basis. The full year should be about 10% higher than in 2013. Domestic magnetite concentrate production should decline by as much as 140mtpa by 2018 such that total imports should exceed 1,150mtpa basis 62%Fe and with lower grade iron ores around 58% Fe this figure should exceed 1,200mtpa.
Source: China Metallurgical Industry Planning and Research Institute
I continue to be amazed at the incessant calls for crude steel production in China to decline sharply and to hear that demand for raw materials into China is slowing. 15%pa growth in 2014 after 10% in import growth in 2013 is a decline?
Nevertheless, the iron ore price has slipped below US$80/t causing hardship for high cost producers, especially those in China. This graphic suggests about 85% of China magnetite concentrate production is losing cash. Perhaps 30% is losing over US$40/t.
The steel mills do not appear to have yet rebuilt depleted inventories and port inventories are now declining and are at a 7 month low. Some of the ore accumulated for low cost financing and placed on these port stockpiles may have now been already sold off and might reduce the additional pressure on the market.
The major producers from BHP, RIO, FMG to Vale have been aggressively producing and selling ore to hurt the Chinese producers and to place pressure on potential new entrants. What is really interesting is the indications that iron ore production costs are coming down rapidly for these big players and should all be below US$60/t CFR basis 62%Fe.
US$80 should be an important level but Chinese steel mills inventory actions will have the final say by the end of the year.
While the US$ has been strong the Yen has not and the Yen makes up 13.6% of the USDX. The Euro makes up 57.6% of this US$ Index and a close look at the cross rates doesn't suggest the US$ is going a lot further from here although it might not fall back much for a while. The Yen is certainly going to be weaker but probably not many other currencies will.
A weaker Yen is also obvious from this graphic says the A$ should be very strong against the Yen.
Outflows of capital from Japan must be expected. The gold price in Yen is also looking quite strong.
But this is also valid technical support with yet another market having three bounces along the support line.
And this graphic is back to crisis levels. Back below 2008 lows and back to 1986 levels. Extreme long term support here for the US Gold Index!
And to clutch at some other straws the sell off in the GDX ETF has been on massive volume and back to this pervasive and remarkable three point downtrend support line that we see in so many markets this year.
And when we look at gold shares against gold it suggests that this is the final selling and capitulation stage - or else gold is going to US$700 and most of the gold industry will close. 
This just screams that we must be near the end of the 42 month decline in gold shares.
I particularly like NST, MML and DRM here as low cost producers and GOR, ABU, KGD, BLK and CGN as developers.
Paradigm has opened an account with a bullion dealer which allows clients to invest directly into gold with delivery or to be held in storage. Talk to me about it if you are interested. Stocks to BUY
The major resources stocks BHP, RIO, FMG, WPL, STO, OSH are attractive opportunities and so many of the juniors are so cheap and very good value where currently funded.
The Dawes Points Outlook is for this market to run for many years to the upside so there will be many opportunities coming through.
For those seeking a general exposure to non resources stocks I can recommend the new A$50m IPO of CBG Capital LIC with a manager whose two funds have outperformed the ASX 200 reliably over the past 8 and 12 years respectively.
Good growth and a fully franked dividend yield of 5-6%pa. The minimum of A$16m has already been reached and the offer has a closing date of 20 November.
A flyer on this will be circulated this week, but please call me on +612-9222-9111 if you'd like to discuss this.
5 November 2014
1 Queensland CSM Royalties
The Queensland CSM royalties underpin the value of the company in the near term through strong revenue generating potential through export sales gas for LNG from the Peat and from the BG Group tenements.
Source: Origin Energy
In addition a major deep gas target lies within the tenement boundaries and may be tested in the medium term.
A notional value of only about A$1m is appropriate here but this could be much larger over time.
BG Group Tenements (HPR 2.50%)
The BG Group permits (in JV with Senex, CNOOC and Tokyo Gas) have 3P reserves estimated at 1500Pj and 1000Pj for ATP 574 and PL 171 respectively. The wells to date have exhibited high deliverability and should be brought into production in 2015 or 2016. BG Group will drill 6 more wells in 2014 that should add substantially to the current combined 2P reserves of 148Pj.
The exact start up of gas deliveries from these permits is not currently known but it should be in FY16. Forecasts are from FY17.
The 3P reserves are expected to provide a 60% recovery and should show high initial delivery then a sharp decline but should have a very long tail. These figures are indicative only and need to be risk adjusted but are a useful guide.
On these terms the revenues at US$5, US$6, US$7 and US$/Gj and starting in FY17 could look like this.
This is pretax EPS of A$20-34m in the first full year (Pre tax EPS of A$0.12 -0.20)
On the same basis the after tax NPVs at various discount rates on 165m shares would become:-
2 The Amadeus Basin Tenements 1% over something potentially really large
I have had over thirty years watching the Amadeus Basin with a first visit in 1980. The opportunity was challenging with very old rocks that might not have any more hydrocarbons, where the geology was highly fractured and where reservoirs were thought to be poor and certainly `tight’.
The early wells were drilled without seismic and sited from aerial photos but the first commercial oil and gas was found in 1964 at Mereenie and more gas at Palm Valley in 1965. Gas was also found earlier at Oorammina in 1963 and another 25-30 wells were drilled with only the 29BCF Dingo gas field discovery in 1984 providing any real success. Production began from Mereenie and Palm Valley in the mid 1980s.
The geoscientists at the Northern Territory Geological Survey NTGS in recent years have done an extraordinary job in bringing so much data together through onsite mapping, aero surveys, navel gazing and picking up the work done by early explorers like Exoil (discoverers of Mereenie, Palm Valley and Oorammina), Amadeus Oil, Pancontinental Petroleum and many more. Central Petroleum has provided a wealth of information. The data is excellent and comprehensive and is serving as a very valuable base in the exploration finally now really underway with Santos’s A$150m farmin in with Central Petroleum.
I had the good fortune to be the instigator of Central Petroleum with John Heugh’s Merlin Petroleum’s Pedirka and Georgina Basins combining with the Amadeus Basin companies to merge to form the new company. Martin Place Securities also underwrote the listing of Central and later on, as He Nuclear, farmed into the Magee helium/gas/condensate discovery of 1992 and the Mt Kitty prospect. Helium is used in the high pressure gas `pebble bed’ nuclear reactors – much safer and 50% more efficient than conventional nuclear power stations, hence He Nuclear. Another MPS company, Petroleum Exploration Australia, farmed in the whole Amadeus and Pedirka shebang to earn 20% by funding seismic and a few sort of stratigraphical wells. Unfortunately the GFC limited that programme somewhat!
So the 1% royalty over much of the Amadeus was a great acquisition for Phoenix and I consider it may prove to be its best asset.
HPR has a 1% royalty over 7 tenements in the Amadeus.
Source: Central Petroleum
The Amadeus is very large in scope in the NT and extends another 150km into WA. Wells are few and far between and seismic is sparse. The age of the Amadeus extends beyond 1100m years, old in most oil terms but large oil and gas fields of similar age exist in China, Russia and Oman. The Amadeus also has three major regional seals that have retained hydrocarbons over hundreds of millions of years. Two, the Chandler Salt and the Gillen Salt effectively cover much of the basin and make the Amadeus an extremely attractive `sub salt’ target that will bring in major oil companies over the next decade. Mt Kitty is likely to confirm this.
Note that Central Pet has now drilled four wells in the Amadeus with a 75% success rate – Surprise, Ooraminna and now Mt Kitty. Drilling of valid 4way dip closures has had a 100% success rate in the Amadeus. An increase in drilling activity might be very exciting to watch.
Geophysical work done by Central included some high definition aeromag that also highlighted many structures that will over time be followed up by regional seismic.
Source: Central Petroleum
This aeromag survey has been an excellent low cost alternative to the very expensive on ground seismic surveys. Over 60 new targets were identified.
The Amadeus is also the target for large scale unconventional oil and gas as the concept of basin centred continuous gas or oil reservoirs is better understood along with many targets in tight gas, such as Mt Kitty.
The Amadeus Basin has had very few wells and little seismic for such a large producing basin.
Source: NTGS
Source: NTGS
And the HVS becomes more oil prone in the west and mostly in EP115 and EPA124 with some in EP111. All very valuable tenements.
Hydrocarbon types in Horn Valley Siltstone Source Rock
Source: NTGS
Geoscientists consider that the Larapinta Group with the HVS as source may have similarities with the Bakken Shale in the Williston Basin in the US in having basin centred continuous oil and gas reservoirs with hydrocarbons migrating up the Pacoota and Stairway Sandstones into conventional reservoirs like Mereenie and Surprise.
Source: DWSPETT NTGS
Now consider that with the HVS (mostly in EP 111 EP 12 and EP115 where HPR holds 1% royalty) a very large hydrocarbon charge has been generated but only three holes have been drilled, Mereenie, Mt Winter and Surprise. And note:-
Source: NTGS
This is Surprise on the west side of the fault. The top green section is the reservoir but other reservoirs may exist below. Surprise West is 0.5-2.0million barrels and is now in production at about 500bopd. Should it be maintained for one year that would be 180,000bbl worth A$18m and A$180,000 to HPR and perhaps a net PV of A$2m to HPR.
Surprise East will be drilled in this June Qtr with a target of about 15mmbbls as shown on the left hand side.
15 mmbbls could be worth A$15m to HPR.
Santos has just completed 327 line km of new seismic northwest of Mereenie in EP115 and also 1587km in the south and east and is reported to be very pleased with the results. More action here.
2013 seismic programme west of Mereenie and in Southern Part of the Amadeus Basin
Source:Santos Mar 2014
Petroleum System B The Heavitree-Gillen Salt System
The Heavitree is a basal sandstone sitting on top of basement and extending over most of the Amadeus and well into WA. This is the reservoir.
The Gillen Member is both source and seal and has evaporite and salt strata that have been mobile and can get squeezed like toothpaste into voids and can act as impermeable seals. The Gillen Salt has sealed Mt Kitty and Magee for over 800m years and given that the helium is still present and at a very high concentration it has been a very good seal.
The Heavitree extends west into WA and gets to more than 600m thick to the west. It is well represented in EP115 and EPA 124 where HPR holds its 1% royalty. No well has been drilled in the mid to lower half of the basin west of Wallara 1.
Source: NTGS
The Heavitree is extensive and may support multi-TCF resources of hydrocarbons and helium.
Note that:-
Source: MPS & USGS
Source: MPS & USGS
The NTGS gives the potential at Mt Kitty very well so here it is in its own words from March 2014:
Source: NTGS
So the 0.5MMCFD flow was as expected. Separate gas flows of each 0.5MMCFD were noted from four separate zones; 2144m, 2156m, 2186m and 2252m. The well will need fraccing and/or horizontal drilling but it should flow very well.
The target was 3TCF of gas/helium. Central was more cautious at 1TCF but I have heard that the Heavitree target thickness was 60m and came in at 109m. So could be bigger. Who knows? No one just now.
This was the section.
Source: NTGS
And this the diagrammatic representation.
Source: NTGS
Central recently stated that the Mt Kitty discovery ` could be the catalyst to interconnect the Northern Territory with the Eastern Seaboard gas market’.
Central also published a helium project study in 2010 that concluded that a helium project could run well based on a gas input feed of 20MMCFD into an onsite LNG plant and railing and trucking LNG and liquid helium out through Darwin.
Capex of A$420m gave annual revenues at A$98-143mpa and an NPV of A$111m-556m. LNG and helium prices have doubled since then so the NPVs must be around A$1000m now.
The royalty income could be A$2-3m pa just from one project.
There is so much more on the Amadeus to discuss and so much is very technical but very positive. We can now sit back and let the operators deliver whatever is really there. I am sure many Big Oil companies will be excited by the subsalt discovery and once the remaining EPAs (especially EPA 111 and EPA124) are converted to EPs the there will be many farmin offers to Central. And carries for HPR.
I didn't get to the third petroleum system in the Amadeus nor the other royalties but they are smaller than the CSM and the Amadeus at present and I will cover them at a later date.
Do note that even the Seychelles royalty at just 0.075% covers potential of over 3.203 billion barrels to give US$240m in ground and
and 0.2% of Karoon's WA482P with this! Note 0.2% of 2.234bn bbls@ US$100/bbl = US$446m!
The risked values are far less but global exploration is continuing and the quality of these long term targets should be assessed within the next few years.
All the smaller permits are covered here.
I will just leave you with these images.
The geologists out there will find them fascinating. For laypeople, the shapes of great curves with overlying flat sediments are very exciting. Let's hope Santos decides to beef up its efforts.
And of course, do not forget this:-
Barry Dawes
B Sc FAusIMM MSAA MSEG
5 May 2014 
New Infrastructure and rising export revenues makes most Africans very happy. All isn’t perfect in Africa but so much is improving.
So we can think of Africa as being more than Sth Africa and that Mugabe creep and as 900m consumers entering the markets and requiring infrastructure of ports, railways, dams, power and telecommunications. Just the sort of things the mining industry needs!
So the rise and rise of Africa is something you should not be ignoring.
The finale of the show and an excellent one at that was the presentation by Planetary Resources about mining asteroids!
And what a concept. Some of the world's most inventive entrepreneurs have backed this and there should be an IPO sometime in the next year or so.
The company has Richard Branson (of course!), the two founders of Google and Ross Perot Jr amongst many other big names and successful people.
The concept is not so much as matter of mining gold or nickel but rather looking for some other high value products to strong market demand. How about water being currently supplied into space at US$30million a tonne? How about extra oxygen? These asteroids contain hydrogen, oxygen, carbon, water and some other useful elements for rocket fuel products. Some asteroids apparently have very high water contents and these rocket scientists consider that water can also be converted to rocket fuel. Water and fuel already in space would make Solar System space travel much easier. Not all asteroids are in the Asteroid Belt. Many small asteroids come reasonably close to Earth so access is not too difficult. Of course there would be gold and platinum in massive size from these alloys and there may be ways to just drop the stuff down to Earth in 500t lots with a parachute! Keep an open mind!
Asteroids have a furnace on one side (the Sun) for very low cost perpetual heating and a freezer (-270oC) on the other in the shade. And there is a vacuum to boot!
Great ideas for heating then cooling. The engineering is what you would expect from rocket scientists but it certainly is interesting.
Of course there is the matter of who owns the asteroids, who to pay taxes to, who gets royalties and will it cause earthly conflicts. And of course some NGOs will be rubbing their hands with glee about a new frontier for them to get their sticky hands onto.
This is not an advertorial for M&M but it is important for everyone to see that conferences like this provide mechanisms for exchanges of ideas and allow the competitive spirit in each of us to come forward.
By the way, the markets are now really moving and we have seen some very strong performances from some smaller stocks. Signs of things to come.
The iron ore price has not collapsed (told you so) and copper looks great. The Paradigm portfolio is looking chipper, especially the smaller stocks, and the next year will be very good.
Keep watching China (Shanghai) and India (Mumbai Sensex) for some excitement over the next year. China has new management( it is taking a while to flow through and with the property market taking a breather I think we might find stocks more attractive there) and India is about to have an election with a possibility of real change occurring there. Especially for stocks, and for gold demand.
Don't be left behind.
I will also be looking at gold again this month and expect we will be seeing a good run very soon.
Beijing 3 April 2014 
The term deposits peaked out a couple of years ago at just over A$540bn but bank savings bank accounts keeping rising and are now the larger component of deposits (building societies and credit unions seem to have been reasonably static for some years). Is this saying that some of the professional investors have shifted into equities and property but households generally are still negative? Maybe we haven't seen the lows in interest rates yet here in Australia? What interest rate is needed to get more of this cash moving?
Well while we are wondering Australia's take on fear and greed, the rest of the world is getting along with life and the global economy seems to be expanding nicely. I do like this SWIFT `Nowcast' Index of transaction flows. Tells you a lot about how the whole world is working. This is for OECD.
OECD is quietly picking up activity and the US is getting better. On global economic matters, however, China is always the topic of discussion and so many non-residents seem to have a wonderful ability to prognosticate quite unsuccessfully on the impending demise of China's economy.
.
Source:World Bank
The growth rate is slowing. It has been for many years but in 2013 it added US$570bn to GDP and in 2014 this should be US$620bn to take total GDP to US$8,850bn. 2014's US$620bn is more than twice the US$ amount for 2009. Some economic slowdown!
And if it isn't China's economic growth rate being a big enough talking point then the next focus issues have to be the impending iron ore price collapse and the demise of the steel industry in China.
Lots of talk and talking heads who think that `Fed policies' will determine the iron ore price. Just like commentators a generation before who knew the Fed` policies' would control the oil price. Certainly didn't work there. People, we have already had peak conventional oil production 6-7 years ago.
So let's look at the steel industry in China and then we will look at iron ore and then look at what it may be saying about China generally. Some very interesting stuff so stay with us here.
First and foremost the steel industry in China is probably the biggest development in any Australian miner's career, experience or lifetime. Global steel production in the 1980s and 1990s was a quaint business that grew at 0.5-1.0% pa (or not!) at about 780-800mtpa. The issues of the day were overcapacity in Europe, new technologies (continuous casting, thin slab casting and new coatings on flat steel products that were revolutionizing building products) and the failure of the Japanese steel industry to get above 110mtpa out the newly installed 140mtpa capacity. Two mtpa new capacity in Rep of Korea was a major industry talking point and the whinges of miners with new underutilised mining capacity were unheard on deaf ears.
So for China with February's new record annualised output of 809.5mtpa you just have to watch with jaw on the ground. In the past decade China has increased output by more than 50mtpa in a year seven times and 90% of it all comes from blast furnaces. The US produces around 88mtpa and Japan is doing 107mtpa. You should really forget about India. It is still only 80mtpa and about 65% is EAF.
Production in China is around 800mtpa and the 2011-2015 5 Year Plan had a 6%pa growth rate that will probably be well exceeded. So expectations of 1,000mtpa are probably still on track.
China has had a strong growth in domestic consumption of steel that has gone primarily into infrastructure and commercial investment such that annual apparent per capita steel consumption of 508kg is above that of the US 323kg (but below Japan 544kg an well below Rep of Korea 1159kg). This is concerning some people.
However, China has produced about 4,000mt of crude steel over the past decade. If it is assumed that ALL of this was utilised domestically it would be 3.1t/capita which is less than 30% of Japan and Korea and about 50% of the OECD average. And of course crude steel is just that and net steel products would be 5-10% less and some must have been exported so the above numbers are conservative. And that is before considering export of finished products like ships or cars.
Steel demand has been for construction and about 60% of output is long products of H-beams, rail, re-bar and wire. Much new capacity is flat and rolled products for consumer durables (vehicles and white goods) where growth is strong and should be maintained. Flat products have moved from about 30% to 40% of output over the past decade.
Steel demand should therefore be maintained at about 1,000mtpa or increase for at least another decade. The dynamics of the current 1,000mt steel capacity in China show major new large scale capacity at the ports and decline in the smaller mills inland.
The new large mills take ~90% imported feed so need more imports as inventory. These take hematite and not magnetite and produce more flat and rolled sheet products which is where the growth is (motor vehicles, white goods etc).
The old mills produce mainly rod and bar (for rebar and H beams for construction) for local and regional provincial markets and make it from mostly local magnetite ore. What has also happened in recent times is that the demand for rebar has been so strong (has maintained a 23% output share for a decade) that the govt has been unable to close these regional mills that supply the low specification rebar steels into local markets and which are so polluting.
The establishment of these new steel mills on the coast has resulted in iron ore imports in Dec Qtr 2013 running at a record of >900mtpa rate.
It is important to understand this in the context of the recent build up in port stocks in China.
Figures of 105mt for 40 ports data today (many tiny ports included here, some only 300kt so not true market stocks) compares with 100mt for 20 ports in late 2012 (about 90mt today) when imports were only about 650mtpa. On 20 ports data it was 100mt/650mtpa = 56 days) in late 2012.
Today, on 900mtpa imports, 20 ports inventory gives just 36 days of inventory. This is why every Australia iron ore producer is selling all output and Gina Rinehart can bring another 55mtpa of capacity on line. So at 900mtpa and rising, 90mt (20 ports data not the Bloomberg 40 ports stuff) is just over a month compared with 40-45% higher eighteen months ago.
The influence of the Chinese New Year Spring Festival is yet to be understood in the iron ore and steel industries but the annualised monthly steel production pattern in the diagram above clearly shows this seasonal event. The combination with Christmas when the Spring Festival comes early seems to have a disproportionate impact. So inventory issues come with steel production and also iron ore. Steel mills run down inventory at this time and this certainly happened in 2013-14.
This period I consider has much to do with the current iron ore price. The decline down to US$104 was possibly the low for this part of the cycle and the sharp jump back to US$110 suggests the market is in reality still very tight. Port inventories could decline sharply as mills rebuild theirs.
The other side of this graphic is that probably 60% of China's magnetite concentrate capacity is losing cash. Almost Chinese iron ore production is magnetite concentrate.
330mtpa of Chinese magnetite ore that on average costs about US$125/t (ore grade is <20% Fe and falling so needs about 6 tonnes to make a tonne of 68% Fe magnetite concentrate.) and some are small underground mines as well.
83% of this output is from small to medium mines and only 17% is from large mines.
This is the marginal tonne of iron ore. High cost producers! Iron ore price has no relationship to Australia costs of production!
We should expect to see as much as 150mt of local magnetite ore production from these small mines shut down and see an increase of hematite iron ore imports.
But don't beat up China over magnetite. The world has used more magnetite than hematite over the past 50 years. It has only been the rise of the high quality Pilbara 63% hematite plus the Brazillian 62% iron ores that fed into Japan that got hematite running.
Magnetite (67-72% Fe) is exothermic, is denser, purer and is really the preferred input into most US and European blast furnaces. Almost all Chinese old capacity has had magnetite feed.
Much of the older steel mills have been constructed around Chinese iron ore mines which are almost entirely magnetite mines producing a 68-69% Fe product.
Magnetite ore requires crushing and grinding of 4-6 tonnes of ore to produce one tonne of concentrate. This is costly and requires large amounts of electric power that is a direct and externally invoiced cash cost.
China uses almost 1.2bn tonnes of iron ore pa and produces about 330mtpa ( ~25%) of this production is uneconomic in cash terms at US$130/t.
The iron ore market may have a surplus in 2014 of about 30mt (have we had it already?) but will be in balance in 2015 and 2016. India's ban on iron ore exports has helped keep the market tight as well.
I still expect higher iron ore prices this year! And new highs in the next couple of years.
Coming back to the steel industry itself, China does have a massive and principally chaotic steel industry that has seen a dramatic increase in steel making capacity that has significant nameplate over-capacity. Almost all (~90%) is blast furnace pig iron from primary iron ore and very little is Electric Arc Furnace (EAF) from scrap(<10%).
Much is new larger size plants that will allow closure of many small plants but the product mix is different with small plants being mostly long products (for H-beams, rod and low spec rebar etc) and the new being sheet, plate and higher quality H beam and rail.
The small regional mills are ideal for local rebar supply and are difficult to close given that demand has been strong.
Most old mines and older steel mills are away from the coast. New mega mills are being located on the coast and are being designed for hematite and will require imported iron ores, not local expensive magnetite concentrates.
Australian miners recognise this and have built capacity to meet the current import demand and future import demand that will grow faster than pig iron production. Imports over the past decade have had a 20%pa Compound Average Growth Rate and are now about 77% of demand.
BHP, RIO and FMG have increased capacity and expect to complete programmes to add additional capacity over the next few years.
These capacity expansions have been at the request of customers who are seeking more ore.
The reports from the iron ore companies have generally more accurate than the views of analysts in North America over the past few years as shown by record iron ore exports and a good iron ore price!
Australian Iron Ore Exports
So the kick in crude steel production in China in February is very interesting and could have an impact on port inventories and iron ore prices. The next month will be very interesting!
Also interesting is the kick in steel being matched by action in the Shanghai stock market.
The Shanghai market jumped 2.72% on Friday 21 March and followed up yesterday with a further 0.91% on the 24th! Short term this looks intriguing.
Medium term this looks very intriguing!
And long term this just looks excitingly bullish!
With the stock market in India powering on to all-time highs, downtrend breaks by Japan and Taiwan and with Rep Korea and Hong Kong ready to shoot higher it seems to me we will be having an Asian Boom very soon!
And with commodities ticking up again everywhere, you guessed it, an Australian Resources Boom!
And to go back to the start of this note, with A$1568bn of Australian bank deposits to fuel it! That is before the foreign investors come in.
To whet your appetite for what is ahead, just look at the graphite stocks mentioned over the past several months. LMB up 1500% and VXL (+1:1 VXLO) up 270%.
I can think of similar numbers for stocks in gold, copper, technology metals, Cooper Basin, unconventional oil and gas, lead and zinc, tin, the many varieties of iron ore, coal and uranium over the next year or so. And many more will come out in things novel and innovative in resources and, of course, mineral discoveries. Remember them?
Barry Dawes
BSc F AusIMM(CP) MSAA MSEG
Hong Kong
25 March 2014
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