Opportunity in the iron and steel industry

Yesterday we demonstrated how important iron ore imports are to China and the lower grade of their domestic mining. Now we turn to the opportunities.

Everybody knows that China dominates global steel production, but few appreciate just how much Australia, Brazil and India dominate global iron ore production.

For obvious reasons, demand in steel drives supply of iron ore and vice versa.

We cannot look at one sector without considering the other.

Furthermore, when politicians elevate grandiose plans to switch Australian export trade from one partner to another, we need to sanity check their thinking.

In the Australian vernacular, the risk posed by political posturing is clear:

They may be talking sh**e, pet.

Nonetheless, we must factor geopolitical tensions into our thinking.

Since iron ore is an input cost to steel making, and the steel price and mill profitability will impact demand, it pays to take a holistic picture of the global steel market.

The global steel market

Steel mills consume iron ore to make pig iron as the basis for making crude steel.

Since iron ore goes to where the blast furnaces are, the aggregate trade in iron ore is inelastic by destination. It is elastic, up to a point, in sourcing from new mines.

In short, global iron ore trade might well start in multiple countries, but the iron ore will go from where the mines are to where the blast furnaces are.

The life for a blast furnace is much longer than that of a typical mine.

Therefore, switching in global iron ore trade is via the source and not the destination.

Obviously, if steel production is growing, and fed from pig iron, and not scrap, then you will see more trade going to where there is growth in blast furnace capacity.

There are Australian think tanks, and politicians, who think that Australia should send our iron ore to trading partners other than those we already have.

The iron ore will go to where the blast furnaces are physically located.

Forget the political posturing. The people advocating for such policies are foolish.

U.S. Steel Blast Furnaces at Gary Works. Built 1906, Shot 1973, Operating 2023.

The blast furnace complex of U.S. Steel at Gary Works has not moved since it was built. That was in 1906. It was commissioned in 1908 and is still operating today.

Think about it. In 116 years, the blast furnace at U.S. Steel did not move.

Funny that.

The geopolitical circus

If you were sitting in a U.S. Think Tank coming up with new ways to punish China for being China, you could try and persuade Australia to not sell iron ore to China.

That might work if the Australian political leadership were callow and foolish.

I will grant that this is quite possibly a correct diagnosis.

However, the Australian public are not stupid, and they have been granted a vote on who leads them. Once they have figured out the risks they may vote differently.

Australia is a democracy, so it is not my call as to how folks should vote.

The bottom line is that if Australia, India, and Canada bow to U.S. pressure to reduce trade with China, then Brazil and Africa will be the big winners in iron ore trade.

If we were discussing lithium, the big winners would be Brazil, Bolivia and, to a lesser extent, Chile, Argentina, and the emerging provinces in Africa, in that order.

Australia would be left fighting Canada for market share in the West.

Investors need to consider the geopolitical risks and hedge for the downside.

The investment hedge for any conflict is to avoid Australian and Canadian exposures.

These would see their market shrink overnight as the U.S. imposed “trading with the enemy” restrictions on their allies, to cut off any and all minerals trade with China.

Needless to say, I am not betting on conflict, and I like Australia and Canada.

However, contemporary U.S. Foreign Policy leads me to want to own less of each.

I certainly don’t want to own more, only to find a collapsed minerals market.

This may seem paradoxical, but it is a direct consequence of Real Politik.

Those who court conflict wind up with a shrinking economic pie.

That is the investor reward for the Pursuit of Perma War.

In short, it will likely pay to diversify your exposure in the majors to include some growth prospects in Brazil and Africa alongside the Pilbara and Canada.

That is the miners.

For steelmakers you may want to tilt oppositely and be behind the tariff walls.