Steel Rush

You may have missed this little tidbit in the news in January from northern Minnesota. The Hibbing iron ore mine (HibTac) went back on line, making it the last of six taconite mines on the Mesabi Range to restart production. Great news for northern Minnesota. But it’s also a signal that demand for natural resources, particularly from foreign countries, is coming back. So what does that suggest for Minnesota investors?

Manufacturing and industrial activity is picking up around the globe. Nowhere is this more evident than in China, where an aggressive $585 billion infrastructure-focused economic stimulus plan has been the driving force behind the global economic recovery. Chinese factory output is already back to pre-crisis levels, and new gross domestic product estimates point to double-digit growth in 2010. Indeed, early indications are that China’s fourth-quarter GDP growth will exceed 10 percent, annualized.

To fuel this growth, China is buying up vast quantities of resources like iron ore, crude oil, copper, and other minerals. Take iron ore, which is the primary ingredient in steelmaking. Even though China is one of the top producers of iron ore, it can’t mine enough to feed the seemingly insatiable demand of its mills, which produced more than half the world’s steel in 2008. In December 2009, China imported more than 62 million tons of iron ore, its second-highest monthly total ever.

China’s stunning demand could push iron ore prices up as much as 30 percent over the next few years, according to some analysts. That’s because global iron ore production is already at or close to capacity. Since China’s steel production continued at a steady clip through the economic downturn, its suppliers—notably, Anglo-Australian firms Rio Tinto (NYSE: RTP) and BHP Billiton (NYSE: BHP)—didn’t need to reduce production. China’s steel producers, in order to keep up with demand, have been forced to buy iron ore in the spot markets, benefiting the taconite mines in northern Minnesota, even though China imports most of its iron ore from Australia and Brazil.

Cleveland-based Cliffs Natural Resources (NYSE: CLF), which operates the HibTac mine but also has mining interests in Australia and Latin America, has seen its stock price increase more than 150 percent since last July, when manufacturing data started showing signs of recovery. The stock continued to rise through mid-January, though it then began to decline.