***COMMENT: Like a salmon (swimming upstream)

The steel industry has a pretty big chip on its shoulder, particularly when it comes to the financial community.
 
Now that banker baiting and derivative damning are en vogue, its little surprise then that the steel sector has been quick to join in.

This time, though, it might have a point.

Speaking on the sidelines of a recent conference for investors in London, a senior executive at a leading steelmaker complained his company had recently come under pressure from its bankers to divest iron ore assets.

This isn’t a new idea. At the peak of the last price cycle, those steel mills which had put money into mining were getting similar advice — get rid of your iron ore while you still can.

So, now that iron ore prices are at healthy levels, the time is ripe for those steel companies that have them to sell their mining businesses at a healthy profit, giving them room to concentrate on core activities, right?

Wrong.

With steel demand at its present depressed level, steelmakers need to be investing in more raw materials assets, not selling what little they have off to the highest bidder.

Just look at the latest settlements — iron ore and coking coal prices just keep on rising.

Speaking in an interview with Germany’s Spiegel, ThyssenKrupp ceo went in hard. Maybe a bit too hard. OK, way too hard.

“A massive bubble is threatening to develop in the natural resources market,” he said. “Its dimensions could even exceed that of the real estate problem in the United States two years ago.”

But, apocalyptic prophecies aside, Schulz did identify some of the core problems for steelmakers.

“As a steel producer, we depend on massive quantities of mineral resources,” he said. “We need coking coal, nickel and, most importantly, iron ore … We can’t do anything to compensate for that fact.”

In this market, many steelmakers lack the control they need to run their businesses successfully.

Savvy investors know this. That’s why a wave of it has flowed into companies that are struggling their way upstream, proving new resources or buying and developing assets with a particular focus on raw materials.

Not much of it is coming from the banks.

IPOs are a possibility, particularly for explorers, but not for everyone. There are other options.

Strategic partnerships and offtake deals have been signed and there will be more soon if ink isn’t drying already.

Private equity involvement is also growing. Smaller players than the world’s giant financial institutions, these companies often have the foresight and flexibility to manoeuvre into markets where banks can’t or won’t.

If the most recent deals are anything to go by, they will do well.