Posted on 15 Sep 2015
Will emerging nations compensate for loss of China steel mojo?
Not only are opinions among the world's big
miners divided over future growth in demand for steel and its principal
ingredient, iron ore, in China, the country's own trade bodies don't
have a consensus on the subject. For example, China Iron and Steel
Association (CISA) believes the country has arrived at a tipping point.
Not all China agencies agree.
CISA has forecast a two per cent fall in Chinese steel production in
2015, the first contraction since 1990. Undisputedly, China's economic
woes, contributing to a fall in local demand for all metals, are leading
to piling up of negative factors for global steel. World Steel
Association (WSA) says Chinese demand, which for the first time since
1995 saw a fall in 2014 will see further demand fall of "0.5 per cent in
both 2015 and 2016". WSA's 'short-range outlook for steel' was released
in the third week of April. Chinese imports falling 13.8 per cent in
August from a year earlier and exports down 5.5 per cent are seen as
pointers to the world's second largest economy growing at a lesser speed
than earlier thought.
The concern for India is that pressure will mount on China to sell
growing quantities of its surplus steel in the world market. In the
first seven months of 2015, China exported 62.13 million tonnes (mt)
more than Japanese production of 61.43 mt in the same period. Slowing
local demand will prompt China to export over a record 100 mt in the
current year. Such volumes leaving Chinese shores will keep a lid on
prices to the dismay of struggling mills in all continents.
Such high exports will heighten China's trade tensions with India, the
US and European Union. When every stakeholder in steel is braced for a
struggle not to end too soon, Rio Tinto's iron ore chief, Andrew
Harding, believes China's production will rise to one billion tonnes
(bt) by 2030 from 822.7 mt in 2014. This will be driven by exports of
steel-based higher value added finished goods, resulting from more and
more Chinese factories moving up the value chain.
Another demand booster will be construction of new homes that are taller
and more steel-intensive, in place of the nearly 25 per cent of present
stock to be pulled down by 2030. Steel demand in China will also get a
leg-up from building of infrastructure, particularly as urbanisation
gets a push and car ownership rises.
Harding's thinking about Chinese steel and iron ore has expectedly left
no impact on the market. Caixin's China general manufacturing purchasing
managers' index (PMI) for August was down to a near six and a half year
low of 47.1.
This is a pointer to persistent sluggishness in Chinese manufacturing as
the economy remains in the process of bottoming out. To be fair to
Harding, he is saying Chinese steel production will be rising only
"modestly" to one bt by 2030, while emerging nations will figure more
prominently in annual global steel demand growth of 2.5 per cent in the
next 15 years.
The "ongoing volatility" in commodities has not stopped Rio to say high
quality ore will still meet with "growing demand". An average two per
cent rise in demand will expand global ore consumption to three bt by
2030, says Rio whose investments in the past few years will lift ore
production in Western Australia's Pilbara region to 335 mt next year and
then to 350 mt in 2017.
What, however, must have given Rio and the world's other leading ore
producers a shock was a fall in the mineral price to $44.59 a tonne on
July 4 from the record of just above $190 a tonne in early 2011. Ore
with 62 per cent iron content has since recovered to $57.42 a tonne for
delivery at Qingdao in China.
But, the outlook remains dispiriting, since China, which accounts for 70
per cent of seaborne trade in the mineral, received 14 per cent less
ore in August at 74.12 mt. Quite a few agencies believe prices at the
current level will not hold. Goldman Sachs sees a possibility of prices
drifting 30 per cent over the next 18 months. Rio's response to a price
collapse is by way of bringing down ore cash costs to $16.20 a tonne in
this year's first half from $20.40 a tonne in the same period last year.
