Bay Street: Steel slump puts crimp in Labrador Trough
Sun Dec 2, 2012 10:31 am EST
By Julie Gordon
TORONTO (Reuters) - "Strike while the iron is hot," the old saying goes, and a legion of iron ore miners setting up in Canada's remote Labrador Trough want to do just that. But, for now, they have to wait.
Iron ore, the main component of steel, has turned ice cold in recent months, with the benchmark price .IO62-CNI=SI plunging to $86.70 a tonne in September from $149.40 in April. It has since recovered to about $116 a tonne.
The downward spiral has jeopardized the viability of the sub-Arctic region's vast iron ore deposits just as the first new mines in decades were opening. Some projects are being put on hold.
As a consequence, shares of junior miners such as Alderon Iron Ore Corp (ADV.TO: Quote), Champion Iron Mines Ltd (CHM.TO: Quote) and Century Iron Mines Corp (FER.TO: Quote), have tumbled as projects that looked rich at $150 a tonne suddenly lost their luster.
Still, analysts say the region's potential remains compelling. They caution, though, that investors must look closely at the contenders to judge which are best placed to ride out the bad times and prosper over the long term.
"There's opportunity for the region, but there are challenges and uncertainty," said RBC Capital Markets mining analyst Robin Kozar. "Many companies will not succeed, but at the same time, some companies will be successful."
The Labrador Trough, which straddles the border between Quebec and the province of Newfoundland and Labrador, has attracted a wave of foreign interest in recent years, as Chinese and Indian steelmakers have scrambled to stake a claim in the world's next big iron mining district.
The region currently produces just 3 percent of the global seaborne supply, about 40 million tonnes a year. But that will grow rapidly if even just a fraction of the dozens of planned projects get off the ground.
For now, a sluggish steel market is weighing against that potential. On Thursday, Chinese steel futures slipped to their lowest level in more than two months, reflecting slower demand in the world's top steel consumer.
The broader global outlook hasn't helped as the European debt crisis and the looming U.S. "fiscal cliff" raise the specter of another world recession.
With steel prices falling and many mills operating well below capacity, steel consumers don't have any incentive to build up inventories, said Kevin Stevick, chief executive at Optima Specialty Steel Inc, a maker of steel products.
"Everyone is keeping their inventories at an absolutely minimum right now," Stevick said.
"They can get it from the mills in relatively short order because the order books are off compared to where they were last year," he said. "So that certainly weighs down on the market."
In the Labrador Trough miners are already retrenching.
Labrador Iron Mines Holdings Ltd (LIM.TO: Quote), a new producer in the region, slashed capital spending and deferred projects to 2013. The junior said it won't restart operations in the spring unless it feels prices will stay above $110 next year.
Cliffs Natural Resources Inc (CLF.N: Quote), a larger producer that has struggled with higher-than-expected costs, has delayed an expansion at its Bloom Lake project and cut its sales volume targets for 2013.