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05-06-2013, 07:01 AM
Steel and iron ore demand to slow
Angus Grigg AFR correspondent
544 words
5 Jun 2013
The Australian Financial Review
AFNR
English
Copyright 2013. Fairfax Media Management Pty Limited.
Shanghai China's new leaders will not embark on a fresh round of fiscal stimulus, leading to an oversupply of iron ore and only moderate growth in steel production this year, the head of China's largest-listed steel producer says.
In a downbeat assessment of the industry's prospects, the chairman of Baosteel, Xu Lejiang, said a painful period of adjustment lay ahead.
"Steel production is much higher than demand in China," Mr Xu said in a rare press conference in Shanghai on Tuesday.
"Iron ore production will also be way higher than demand shortly."
Mr Xu expects steel production to grow at between 1 per cent and 2 per cent this year, well down on the double- digit rates over the past decade.
China produced 716.5 million tonnes of crude steel in 2012, up 3.1 per cent from the previous year.
Mining giant Rio Tinto is expecting Chinese steel production to grow at a compound annual rate of 3 per cent over the next decade and steel production to peak at around 1 billion tonnes after 2020.
But many analysts doubt such a level will ever be met and believe steel production may peak in the next few years.
Chinese steel mills ramped up production at the end of last year in expectation that the incoming leadership would roll out new projects to boost the economy. But these projects have failed to materalise, pushing the iron ore price down 30 per cent over recent months to $US111 a tonne on Tuesday.
Steel prices in China have slumped to their lowest level since April 2009.
"The central government is focusing on economic transformation," Mr Xu said. "People are starting to realise there won't be another 4 trillion yuan [$645 billion] stimulus package."
In response to the global financial crisis, the Chinese government kept the economy growing strongly by financing a string of infrastructure and property projects.
The stimulus spending helped push iron ore prices to a record high of $US190 a tonne in February 2011, but also led to a spike in public debt and further distorted the economy. Premier Li Keqiang has said reform of the economy, rather than elevated growth rates, is his priority. China's economy is forecast to grow around 7.5 per cent this year.
Macquarie Group's Shanghai based commodities analyst, Graeme Train, expects the iron ore price to fall below $US100 a tonne as steel mills and traders continue to run down inventory.
"The price has been weak because of supply, not demand," he said. "We are going through another round of iron ore de-stocking."
He expects that process to run for another two months, despite steel demand growing by about 10 per cent in the second quarter.
"That's off a low base from last year, but demand looks OK," he said.
"The issue is that mills and traders are sitting on a great deal of expensive inventory which they are now putting into the market."
The profitability of China's steel sector has slumped in recent years as mills expanded production despite sluggish growth. The sector is now struggling with high levels of excess production capacity.
Fairfax Media Management Pty Limited
Document AFNR000020130604e9650002b
Angus Grigg AFR correspondent
544 words
5 Jun 2013
The Australian Financial Review
AFNR
English
Copyright 2013. Fairfax Media Management Pty Limited.
Shanghai China's new leaders will not embark on a fresh round of fiscal stimulus, leading to an oversupply of iron ore and only moderate growth in steel production this year, the head of China's largest-listed steel producer says.
In a downbeat assessment of the industry's prospects, the chairman of Baosteel, Xu Lejiang, said a painful period of adjustment lay ahead.
"Steel production is much higher than demand in China," Mr Xu said in a rare press conference in Shanghai on Tuesday.
"Iron ore production will also be way higher than demand shortly."
Mr Xu expects steel production to grow at between 1 per cent and 2 per cent this year, well down on the double- digit rates over the past decade.
China produced 716.5 million tonnes of crude steel in 2012, up 3.1 per cent from the previous year.
Mining giant Rio Tinto is expecting Chinese steel production to grow at a compound annual rate of 3 per cent over the next decade and steel production to peak at around 1 billion tonnes after 2020.
But many analysts doubt such a level will ever be met and believe steel production may peak in the next few years.
Chinese steel mills ramped up production at the end of last year in expectation that the incoming leadership would roll out new projects to boost the economy. But these projects have failed to materalise, pushing the iron ore price down 30 per cent over recent months to $US111 a tonne on Tuesday.
Steel prices in China have slumped to their lowest level since April 2009.
"The central government is focusing on economic transformation," Mr Xu said. "People are starting to realise there won't be another 4 trillion yuan [$645 billion] stimulus package."
In response to the global financial crisis, the Chinese government kept the economy growing strongly by financing a string of infrastructure and property projects.
The stimulus spending helped push iron ore prices to a record high of $US190 a tonne in February 2011, but also led to a spike in public debt and further distorted the economy. Premier Li Keqiang has said reform of the economy, rather than elevated growth rates, is his priority. China's economy is forecast to grow around 7.5 per cent this year.
Macquarie Group's Shanghai based commodities analyst, Graeme Train, expects the iron ore price to fall below $US100 a tonne as steel mills and traders continue to run down inventory.
"The price has been weak because of supply, not demand," he said. "We are going through another round of iron ore de-stocking."
He expects that process to run for another two months, despite steel demand growing by about 10 per cent in the second quarter.
"That's off a low base from last year, but demand looks OK," he said.
"The issue is that mills and traders are sitting on a great deal of expensive inventory which they are now putting into the market."
The profitability of China's steel sector has slumped in recent years as mills expanded production despite sluggish growth. The sector is now struggling with high levels of excess production capacity.
Fairfax Media Management Pty Limited
Document AFNR000020130604e9650002b