Iron's Bear Market: Too Much To Bear?
Iron represents the biggest building block of the known world, with the United States alone consuming 50 million tons per year on everything from iPhones to cars to brand-new football stadiums. The boom days of iron ore appear to be well and gone, however, with consumption lagging behind the peak levels of 2008 to 2012, when iron ore reached thresholds of $200 per ton compared with less than $50 per ton today. For some companies, the price of iron has fallen below the break-even point, spelling disaster for businesses and even entire nations. What's bad news for business can be good news for investors, however, who have paid attention to the efforts of mining companies to stay ahead of the curve.
On Paper Performance
Look at a graph of iron's performance in the past five years to get the rundown on the metal's current status. The slowdown in demand has come from a hiccup in Chinese and European markets. China created around 850 million tons of steel in 2014, a drop of about 9% compared to the year prior, with no expectations of that figure rising. The ripple effect has spread far across the world and left some companies without any option other than filing for Chapter 11. Perhaps the best (or worst, depending on your perspective) example comes from the sale of the Bloom Lake mine in Canada from the destitute Cliffs Natural Resources, who lost 75% of their value in 2014. Cliffs trades on the NYSE for $5.07 per share as CLF; this time last year they had a stock price of over $20 per share. Selling off the mine means that Cliffs won't need to foot the bill for its closure, estimated to be $120 million, but won't bode well for their long-term operations.
99% of all iron mined within the United States comes from either Minnesota or Michigan. 2014 proved to be a bumper crop for both states, as the US generated about five billion dollars in overall production of iron. Even so, that puts the United States in just 8th place for worldwide iron ore production, with less than 5% of the total iron capacity of world-leading China and less than 10% of second-place Australia. Where both China and Australia have failed to turn their iron surplus into profit, however, the US has pulled ahead of the curve by aggressively recycling waste ore from dumps rather than invest all money into pulling more metal out of the ground. The benchmark example of this US ingenuity comes from Magnetation LLC, who opened a $170 million plant that specializes in breaking down ore waste into the iron pellets that provide the raw material for steel plants. In addition to ore waste, companies like Magnetation are looking to harvest crude taconite, a lower-grade variant of iron that previously had been considered unprofitable. As supply of the highest-grade ore drops, however, taconite may represent the future of iron commodities, with Minnesota churning out nearly 40 million tons per year. It's not all wine and roses: the closure of the Minntac plan means the loss of 700 jobs and 16 million tons of iron pellets. U.S Steel's stock price reflects the closure of the plant, having lost almost 50% of its total value in just six months to the point where they trade today for $24.64 on the NYSE.
Australia's Great Dilemma
In a nation that depends on mining for over 50% of their total exports, Australia has felt the pinch of the iron bear market more than perhaps any other nation. The fallout has officially turned political, in fact, with mega-corporation Rio Tinto (RIO trading for $41.49 on the NYSE) leading the charge to enact price controls on iron and get government assistance for operations in order to retain their 200,000 employees. Australian Treasurer Joe Hockey finds himself in a particularly nasty situation where he must try to mitigate the taxpayer money spent on mining practices without putting entire swaths of the population out of work. Hockey has publicly announced that the government would put the lid on cartel-like agreements between Australian mining conglomerates acting together to surpress supply and increasing prices. In response, mining kingpin Andrew Forrest called on competitors to enact a production cap of 180 million tons. The chess game between Australian parliament and Australian companies seems destined to come to a nasty end unless Australia's principle customers begin to raise their demand for iron. Hockey identified key allies who must step up their commitment in order to take on more iron, calling out the lack of capability for Indian infrastructure to handle the necessary imports needed to keep their economy growing at a brisk 5% pace. Australia has chosen to sit on their stockpiles for the time being, but weathering the storm may look like a poor decision if a solid rebound doesn't come over the horizon soon.
Picking Up The Pieces
If you believe in the maxim of buying low and selling high, it's hard to do better than buying iron at this very minute. With no particular market set to emerge and require iron in large quantities, however, it could be a year or more before selling high becomes a viable second act of the strategy. Iron ore futures have been dropping steadily for three months straight and only in April have they seen a positive trend. It's hard to say if we've hit the bottom of the parabola, but it's clear that there's no much worse the iron market can get. More companies will continue to go out of business for each day that iron trades below $50 per ton. An uptick, as such, may come in the same way that the slow revival of oil has come at the hands of about fifty companies declaring bankruptcy. For now, iron's a long game, but it's also one of the surest games in town.