For Once, Chinese Growth Might Not Be the Most Important Factor for these Companies

Indonesia is a prime example of why iron ore and metallurgical coal both have bright futures.

Jan 3, 2014 at 10:20AM

Steel is a base necessity for economic development. Although fast-growing China's supply/demand situation is out of balance, other developing countries aren't faced with the same overabundance. That's why the president of Indonesia's recent call for more steel production is good news for iron ore and metallurgical coal producers.

Too much of a good thing
John Ferriola, CEO of U.S. steelmaker Nucor (NYSE:NUE), noted that coal imports "approximately double" their 2009 level are hurting his company's business. One big culprit is China, a country he says has at least 300 million tons of "excess steel capacity."

Since China is one of the fastest growing countries on the planet today, it makes sense that it would have plenty of steel capacity. But a slowdown in growth has clearly left it with an overabundance. Thus, accusations from Nucor and other U.S. steel mills have emerged of Chinese companies selling steel below the cost of production in the United States just to offload it.

However, China appears to be trying to cut back in the steel sector, something it is also doing in the coal industry. That's welcome news at Nucor, but such news out of China is overshadowing the still significant need for steel and its various components in other developing nations.

For example, at the late December opening of a new steel mill, Indonesia's president said, "Today's steel plant inauguration is concrete realization of our efforts to improve the capacity of the domestic steel industry." He went on to add that, "Currently, steel supply is still much less than we need."

Beyond China
Although domestically focused Nucor won't likely see much benefit from developing economies around the world, iron ore and metallurgical coal miners will. For example, Canada's Teck Resources (NYSE:TCK) counts China as a big customer for its steel making coal. But since it's already sending the stuff to Asia, there would be few, if any, logistical issues with sending more coal to markets like Indonesia.

The same goes for India, another developing nation where coal demand has been robust. But iron ore doesn't look like it will be far behind. In an official release, India's Ministry of Steel has noted that, "Considering the growth of the iron and steel industry and planned steel capacities, the present resources of high grade iron ore in [India] may not be sufficient to meet the long term requirement of [the] domestic iron and steel industry."

That's a good sign for ArcelorMittal (NYSE:MT), which is one of the largest steelmakers in the world with significant operations in India. However, it's also a major producer of met coal and iron ore. In fact, the company has big plans on growing its iron ore business—putting the division on par with its steel making operations.

On some level, that makes ArcelorMittal a one-stop shop for exposure to steel and its components. However, a company like Teck provides more focused exposure. So, too, does Vale (NYSE:VALE), which expects seaborne demand for iron ore to grow by 35% over the next 15 years or so. While India, going from self sufficient to importing, is an important part of that projection, smaller nations like Indonesia are also a key piece of the puzzle.

In fact, Vale plans to spend around $4.5 billion on its iron ore business in 2014. Teck, meanwhile, has been producing record amounts of metallurgical coal despite the weak pricing environment for that steel making input. Both are setting up for top and bottom line bumps when iron ore and met coal prices recover.

Smaller, but important
Indonesia and India may not have the heft of China when it comes to steel, iron ore, and met coal, but they are key markets to watch. And while it's important to monitor the headline grabbing giant nation, you can bet that steel industry suppliers like Teck and Vale are keeping a close eye on the other developing economies in the region, too. You should follow their lead.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Nucor. The Motley Fool owns shares of Companhia Vale Ads. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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