Hello. Welcome to Company Focus. My name is Aamer Nawid. I'm a Research Analyst at Fat Prophets and this week I'm going to be taking a look at the major players in iron ore production.

April has been quite a significant month in the world of iron ore. Given that iron ore is the main constituent of steel and steel accounts for around about 95 per cent of global metal consumption, it's an area that affects us all and we should all sit up and take note.

What's basically happened is the main producers - Vale from Brazil, Rio Tinto and BHP Billiton - have scrapped annual pricing negotiations with steel makers and have now switched to a quarterly pricing review. Looking at Chinese steel demand, it's clear that this move is going to be a benefit to the miners, to the earnings at these mining companies, and has been met with a fair bit of resistance from the Asian steel makers.

For Vale, BHP and Rio Tinto iron ore is of huge importance. They're all diversified miners. However, a third of BHP's profits come from iron ore, half of Rio's profits come from iron ore. In terms of significance, Vale is the globe's biggest iron ore producer and is accountable for over 80 per cent of Brazil's total output.

As you can see from this chart, which shows the progress of the global materials ETF, the price of iron ore has blazed quite a trail as the Chinese fiscal stimulus, infrastructure focused fiscal stimulus, $600m stimulus, has actually taken affect.

Last year, annual price contracts between the steel makers and the iron ore producers were averaged around about $60 per tonne. This year, this current quarter, it is expected that this price will move up to around about $110 to $120 per tonne. That represents quite a significant uptick of around about 80 to 100 percent relative to last year.

What's different this year, though, is as the year winds out, should steel demand remain robust, then the uptick in terms of iron ore prices will basically filter right through down to earnings off the big three whereas in previous years obviously this wasn't the case. This is going to produce tens of billions of dollars of profit benefits over coming years.

So how come the share price performance of the big three hasn't really lived up to expectations over the past month since the announcement was made? Well expectations for one. I think the increase in iron ore prices was no great news flash. Maybe the way in which the contracts were reviewed was uncertain, but during the opening quarter of the year, the miners did rally hard in anticipation of this increase.

In addition to this, the move has actually prompted some negative reaction from steel makers and competition regulators across the globe and maybe investors are a little bit wary of a reaction here. Regulators are concerned that the big three control around about 70 per cent of the seaborne iron ore market which is quite a significant amount.

You've obviously got the threat of intervention from these authorities, but also investors might be focused on the fact that the market is very concentrated on China. Now obviously China is growing very, very rapidly - 12 per cent a quarter. Q1 GDP growth is robust. But given that 70 per cent of the seaborne imports were absorbed by this one single economy, what would happen hypothetically to the iron ore price if China was to say hit the wall? What would happen to the share price of the miners if this was to occur? Now obviously I don't believe this will occur. I think the Chinese model is sustainable. However, this may be something which is concerning investors.

For BHP and Rio production numbers have recently been released for the first quarter of this year and they weren't entirely positive, let's put it that way. Just at a time when you want to be ramping up iron ore output at renegotiation time of these prices, both BHP and Rio produced quarter-on-quarter falls and that may have been a factor which has positively resulted in sort of indifference in terms of the share price performance.

Rio and BHP are both sort of trying to tie up their Western Australia operations, their iron ore operations, to basically maximise efficiencies, reduce cost base, expand margins. Now even though they're not going to collaborate in terms of the sale price in terms of their iron ore, the move has attracted the attention of regulators in Australia, Europe and China and again, possible intervention in this particular area could potentially be a catalyst for the sideways share price moves. I mean the stakes are fairly high. The tie up will produce $10bn worth of synergies, so it's not unrealistic to think that this could be weighing down on the share price sentiment in the near term.

The Australian regulator has actually given an end of May deadline for a ruling about the tie up, so I expect that Rio and BHP shares up until then to tread water, if at all, and then beyond that, continue their upward momentum.

Demand remains robust. China is obviously fuelling this. But even if the Chinese authorities try and cool the economy to say high single digit sort of GDP, sustained GDP growth, I think there is others out there such as India and other emerging economies who are capable of picking up the slack.

As far as the supply side is concerned, Rio's recent results just underline the fact that commodity supply generally is at the mercy of factors such as the weather, such as mine maintenance and lower grades. Remember, over the last 18 months, these mining companies have been scaling back operations because of the global financial crisis and given that a reversal is easier said than done, I think the supply side of the equation will feed through into higher commodities prices and will essentially benefit the mining stocks in the long run.

Thanks for watching. Make sure you tune in again next week.