It has been a long week and I have been traveling a lot, so sorry about the scarcity of updates. I have spent most of the week thinking about why I like to own mining assets and not steel mills.
When I started in this business, I read every history I could get my hands on, and because of the unique perspectives of recent histories, I rather liked reading dated books. What was really interesting was reading about U.S. Steel from a 1910 or 1920 perspective. From the perspective of writers at this time, U.S. Steel could make no mistakes—well, they were ruthless—but they were going to be the golden boys forever.
By 2000 or so, U.S. Steel had the same market cap that they had at the time of their IPO. After 100 years of being a huge company, their total value was the same as it had been when they began: in absolute dollar terms, around 2.5 billion USD. Now, of course, in 2008, the valuation is massively up, but it still is probably less than the replacement cost of their plants.
Now we are on to another expansion boom and I am asking myself the question, what will be different? Will demand stay beyond the ability of China, India, and everyone else to add capacity? There is no barrier to building a steel mill beyond having land, water, and a bank account. Of course, it helps to build one where you have open water to bring ore and coal in cheap and ship out the steel, but people have made mills work without even that asset.
Over the next 20 years, (macro time, I know) steel is going to be a zero-sum game. The only saving grace is the iron ore oligopoly might have the common sense to cut back ore supplies if the market gets weak.
I can promise you that some highly leveraged steel companies, when faced with making their bond payments, will cut prices and cut prices to sell that last tonne of production.
I think the way to make money is to buy mills or shares of mills cheap and sell them dear, but unless you are Mittal with his iron touch, this is a hard business.
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