Big Picture E-mail: Iron's in the Fire

January 13, 2010 / Jim Letourneau

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One of the most entertaining times of the year for resource investors is the annual iron ore negotiations between the Big 3 iron ore producers, Vale (VALE), Rio Tinto Group (RTP) and BHP Billiton Ltd. (BHP) and China, the world's largest iron ore importer. I'm not sure which company plays the roles of the Good, the Bad and the Ugly in this annual drama but it plays out like a classic western movie. There are showdowns, hostages, threats (idle and otherwise), along with the realization that both parties will be forced to cross paths in a sequel.

We haven't seen any killings yet and that is great news for the "hostages" in this movie, the 4 detained Rio Tinto executives still face charges of obtaining Chinese commercial secrets.

Despite China's large iron ore demand, the big 3 intend to reach deal with their Japanese customers and the present it to China on a "take it or leave it" basis.

What really matters in all of this is that there is a consensus that the iron ore price will be higher in 2010. That is music to the ears of resource investors.

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What kind of companies might benefit from renewed interest in bulk commodities like iron ore and coal?

Drilling services companies like Energold Drilling (EGD.V) and Major Drilling (MDI.TO) are a solid place to start when it comes to exploration drilling.

Dry bulk shippers ship commodities like iron ore, coal, cement, fertilizer, and grains. The Baltic Dry Index has recently been called into question as an economic indicator by some commentators because the index is now dominated by Chinese demand for commodities (especially iron ore from Australia). Commodity investors already know that China is the center of the universe.

Here is a starter list of dry bulk shipping companies:

Euroseas (ESEA)

Safe Bulkers (SB)

Diana Shipping (DSX)

Genco Shipping (GNK)

Dryships (DRYS)

Excel Maritime Carriers (EXM)

Mining Equipment companies like Joy Global (JOYG) and Bucyrus (BUCY) are seeing orders pick up. Bucyrus gets ~75% of its revenues from coal companies. They sell giant draglines along with the belt systems that move the coal around. Bucyrus recently acquired Terex (TEX) for 1.3 billion in cash. This is expected to double Bucyrus' global market. Finning International Inc. (FTT.TO) is a global dealer for Caterpillar equipment which is widely used in mining and forestry.

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