by Tony Daltorio, Investment U
Wednesday, April 21, 2010
If you read my article on April 5, you know that the iron ore market is changing… a lot.
In the past, iron ore producers and steelmakers negotiated fixed, yearly prices. Now though, prices will be set in quarterly contracts linked to the spot market.
That means major iron ore producers can expect huge profits going forward, especially considering that prices are 100% higher than last year's.
And it could easily go higher, considering China's latest move on the subject.
Chinese firms can no longer import low-quality iron ore, which means anything with less than 60% iron content in this case. That means they can't buy from India, the market's third largest exporter in the world. Shipments from there contain only between 55% and 58% actual iron.
Australia and Brazil – the two leaders in the trade – don't have to worry. Australian ore weighs in with 62% iron content, while Brazil boasts 63.5%-65%. But with India out of the running, the market has little choice but to tighten in the next few years considering China's growing demand.
China leads the world in importing the commodity, with about 70% of the seaborne market, up from 16% in the last ten years.
Investors can get involved through one of the big boys, like – BHP Billiton ADR (NYSE: BHP), Rio Tinto ADR (NYSE: RTP) and Vale ADR (NYSE: VALE).
Or they can choose a more risky but potentially more rewarding way of banking on the changing times.
Brazil's "Hidden" Iron Ore Treasures
Long before the 100% rise in iron ore prices, Brazil's rich mining sector was gearing up to meet rising demand from China and other fast-growing markets.
That includes Companhia Siderurgica Nacional – CSN ADR (NYSE: SID), commonly thought of as only a steelmaker.
It does make steel. But it also has plans to spin off its iron ore and logistics assets some time this year. It's just deciding whether to offer them together or separately at this point.