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Steel firms in the limelight after huge ore find in Liaoning

By Wang Ying (China Daily)
Updated: 2009-07-01 08:06

The discovery of a large iron ore deposit in Liaoning province will benefit the steel industry and mining enterprises in the province. [Bloomberg News]

Two steel companies are in the stock market spotlight after reports of the discovery of a large iron ore deposit in Liaoning province.

The two Liaoning companies, Angang Steel and Bengang Steel, had separately "clarified" their involvement in the fabled mine after their shares were suspended from trading earlier this week because of the "unusual" price surge.

The reported 3 billion tons reserve, owned by the little known Shenzhen Yizhongxin Mining Investment, exceeds the combined reserves of Angang and Bengang. Yizhongxin was founded in 2007, with a registered capital of 10 million yuan.

Despite skepticism about the reported size of the ore reserve, analysts and investors are convinced that the steel industry as a whole, and Liaoning mining enterprises, would benefit from the find.

The 3 billion ton of iron ore is estimated to be worth around $246 billion, according to the latest spot market prices from steel information provider Steel Business Briefing.

Related readings:  Iron ore talks go into extra time  Vale sees stable 2009 iron ore exports to China  Major iron ore suppliers to China  Major steel mills back in black

Shenzhen-listed Angang Steel shares dropped 3 percent to close at 13.19 yuan yesterday after resumption of trading on Monday, while Bengang Steel increased 1.42 percent to close at 7.87 yuan.

Reports of the super ore reserve near Benxi, an industrial town in northeastern Liaoning province, began circulating the market on June 23. The following day, the prices of Angang shares surged 7.42 percent to 14.18 yuan, while Bengang jumped the 10 percent daily limit to 7.48 yuan per share in Shenzhen.

Trading in the two listed companies was suspended on June 25 on rumors that they had invested in the newly discovered iron ore reserves.

On June 26, the two companies issued separate announcements to clarify their relations with the super mine. Angang Steel said the company did not consider investing in the mine.

Bengang Steel denied media reports that it had 20 percent stake in the Yizhongxin mine, but said that it intended to participate in its exploitation. Bengang added there would be no large asset restructuring or capital injection.

Wang Jianhua, research director with mysteel.com, said the two listed companies would definitely benefit from the new discovery at Yizhongxin mine. "Bengang Steel, which is situated closer to the Yizhongxin mine, would enjoy steady iron ore supplies at low transportation costs," Wang said.

Reports of the discovery at Yizhongxin mine came at a time when the annual price negotiations with overseas iron ore suppliers are approaching the closing stage.

Industry experts said reports of new finds would help strengthen the hands of the Chinese steel producers, who have insisted on an average 40 percent reduction from last year's prices.

An analyst speaking on condition of anonymity noted that it was a strategic move to announce the discovery of such an iron mine at this point in time. He speculated that the announcement was timed to help Chinese negotiators gain a bigger say at this year's iron ore price negotiations.

In fact, large iron ore deposits were discovered at the Yizhongxin mine in the 1970s, but there was no accurate estimation of the total reserves because of the lack of sophisticated exploration equipment, said the analyst.

In 2006, experts estimated the reserve in Yizhongxin at 1 billion tons, and early this year, it was scaled up to 2 billion tons. The latest estimate of 3 billion tons was made a few weeks ago. The cost of mining the ore is, however, expected to be prohibitively high as it is buried nearly 1 km below the ground surface.

But the discovery is still great news for the steel industry as its existence can in any way help the price negotiation. As the minister of land and resources had said recently, a $1 reduction in the price can save up to $500 million a year in imports.