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.
