Replies to post #537 on The Rising Influence of Rising Affluence

[DewDiligence]

China’s Steel Appetite Propels Prices Higher for Raw Materials

[See #msg-43984108 for a related story.]

http://online.wsj.com/article/SB10001424052748703535104574646600280362462.html

›JANUARY 11, 2010
By ROBERT GUY MATTHEWS

China's surging demand for steel this year is expected to dominate the landscape of the steel industry as never before.

Already the world's largest producer by far, the country is expected to rev up production by nearly 10%. But the higher output likely won't exceed demand, pushing prices higher worldwide for steel, its raw materials and even coal [i.e. met coal rather than thermal coal].

Steelmakers, which idled dozens of mills and cut production as the global economy slowed, are now ramping up. Rio Tinto, which sells the most iron ore to China, is restarting production. Iron ore is a key ingredient in making steel. Arcelor Mittal, the world's largest steel producer, is raising prices, as is China's largest steelmaker Baosteel Group Corp.

China also is trying to unify a fragmented and sprawling domestic industry to present a strong, unified voice in price negotiations for sales and purchases of raw materials. The idea: Capitalize better on the country's huge appetite for the materials that make everything from refrigerators to bridges.

China is expected to produce a record 600 million metric tons this year—about half the world's total output. The next biggest producer, Japan, will make just one-sixth of what China is expected to produce. The U.S. was fourth in production, behind Russia, last year.

China's continued resilience was the dim light in an otherwise dreary year for miners and steelmakers, marked by layoffs, mine closings and production and investment pullbacks as prices for commodities tumbled. And it looks to be the beacon going forward, along with India, to a lesser extent.

While other economies are strengthening, they don't offer the same potential for growth as China, which makes penetrating that market critical. "Chinese steel production and demand is likely to continue its inexorable rise," says Peter M. Fish, economist for MEPS International, a steel consulting firm.

That, in turn, is good news for all metals and minerals sellers.

Iron-ore spot prices, at about $110 a metric ton, have been climbing toward their highest level in more than a year. Coal prices for steel mills and electricity production have surged by more than 30% as the Chinese last year curbed production due to environmental concerns. Copper, aluminum and zinc prices also have risen.

"The recovery of all commodities has exceeded expectations," says David Butler, analyst at J.P. Morgan Cazenove.

Australian ports are becoming congested again, with coal ships in line on the ocean, waiting to load and unload.

Robin Walker, a spokesman for Rio Tinto, the largest seller of iron ore to China and which sells a substantial amount of coal, says its economists are revising projections from August regarding Chinese demand. "The new update could show that growth is stronger," he says.

BHP Billiton, the world's largest miner, Rio Tinto, Australia's Fortescue Metals Group Ltd. and Brazil's Vale all are increasing production of iron ore, and in some cases coal, to meet the expected increased demand in China.

China's Baosteel, an industry bellwether, told buyers last week that it would increase steel-sheet prices by 5% beginning in February, marking the third steel price increase in as many months.

"With January hikes now sticking well, we expect to see further price increases announced in China as well as Europe and the US," says Michelle Applebaum, an analyst at steel research firm MARI in Chicago. "Chinese steel demand is profound, and rising raw-material costs are driving an inflationary spiral in the region as steelmakers and their customers clamor for material."

Massive government stimulus and infrastructure plans [#msg-43984108]—including for rails, roads and bridges in eastern China and for general construction and factory building in the western part of the country—are fueling demand. Most of the steel production will be consumed internally, says the China Iron and Steel Association, the main steel trade group in the country.

China's exports have dropped between 10% and 50%, depending on the product and country in the last year, which is welcome news for ArcelorMittal Chief Executive Lakshmi Mittal. Mr. Mittal says that last fall, China's steelmakers remained fairly disciplined about keeping their steel from flooding foreign markets, which has helped steelmakers around the world raise prices.

The downside for ArcelorMittal and other steelmakers is that raw-material prices will likely rise as the companies compete with Chinese steel mills to secure the coal and iron ore needed to fuel and feed steel plants.

This week, Australia and China signed a $3 billion coal deal, the largest buyout by a Chinese firm in Australian mining history. The purchase of Australia's Felix Resources Ltd. by Yanzhou Coal Mining Co. could open the door to more acquisitions this year.‹

[DewDiligence]

Morgan Stanley cuts JOYG to Sell based on CAT’s buyout of BUCY.

Huh?

Well, the downgrade makes sense insofar as there are few potential suitors for a company like JOYG and CAT has just taken itself out of the running. Thus, MS says JOYG ought to now have less rather than more of an implcit buyout premium in its share price.

[DewDiligence]

JOYG Acquires LeTourneau for $1.1B

http://www.ft.com/cms/s/0/58880c58-7fdb-11e0-b018-00144feabdc0.html

›By Hal Weitzman in Chicago
May 17 2011 00:23

Joy Global, one of the biggest makers of mining equipment, has struck a $1.1bn deal to buy LeTourneau Technologies from Rowan Companies in a further sign of consolidation in the sector.

The acquisition comes six months after Caterpillar, the biggest maker of earthmoving equipment by revenue, paid $7.6bn for Bucyrus International, a US maker of mining machinery which is Wisconsin-based Joy Global’s main rival [#msg-56696672].

By strengthening Caterpillar’s position as the top mining equipment maker, that deal put pressure on Joy Global to do a merger or acquisition in order to become a bigger player in a fast-growing global market that is estimated to be worth some $40bn annually.

The two acquisitions demonstrate bullishness among heavy equipment makers about the long-term strength of commodities and extractive industries, particularly in emerging markets [duh].

Capital spending is forecast to increase by at least 15 per cent this year from 2010, according to Jefferies & Company, the US investment bank, in response to demand from China and other emerging countries.

Like the Caterpillar deal, Joy Global’s acquisition creates another powerful North American player in a global sector seeing increasingly fierce competition from emerging market rivals.

The purchase of Texas-based LeTourneau would enable Michael Sutherlin, Joy Global president and chief executive, to diversify his customer base by expanding the company’s presence in the mining-equipment sector and entering the oil and gas drilling market.

“The drilling products business moves us into another area of resource extraction that has similar fundamentals and value drivers as surface and underground mining,” Mr Sutherlin said on Monday.

Entering the drill-making business is something of a homecoming for Mr Sutherlin, who ran the drilling equipment unit of Varco International in the 1990s.

Joy Global expects the deal to generate some $40m in cost savings, but Mr Sutherlin said the deal was primarily aimed at opening up new opportunities, such as tapping LeTourneau’s presence in emerging economies and growing demand for large equipment such as wheel loaders.

“We’re looking at markets that we don’t currently serve very well,” the Joy Global chief said, citing examples such as the iron-ore sector in Western Australia, coal mining in Indonesia and emerging mining countries such as Mongolia and Mozambique.

LeTourneau had revenues of $815m last year, with $556m from its drilling products business and $259m in mining revenue.

Mr Sutherlin said he did not expect any other company to try to break up the agreed takeover. “It’s locked and loaded,” he said.

The company said it would fund the acquisition with cash and borrowing, most likely via a bank loan but also possibly through a public offering.

Bank of America Merrill Lynch advised Joy Global, while Barclays Capital was Rowan’s adviser.‹

[DewDiligence]

Komatsu—(CAT’s biggest competitor)—acquires JOY for $2.9B in cash:

http://www.wsj.com/articles/komatsu-to-buy-joy-global-for-2-9-billion-as-japanese-firms-shop-abroad-1469090966