Heady days over for iron ore demand

PUBLISHED : Monday, 23 July, 2012, 12:00am
UPDATED : Monday, 23 July, 2012, 12:00am


Car sales have cooled on the mainland, potential homebuyers have been delaying purchases and there's less track being laid for high-speed rail lines these days.

Manufacturing data point to a weak outlook, and construction of affordable housing is running behind schedule.

It's all spooked investors, who have sent commodity prices tumbling. BHP Billiton, the world's biggest miner, is even putting the brakes on an US$80 billion five-year plan to expand production of iron ore, coal, energy and base metals that was born out of big expectations for demand from a rapidly urbanising China.

Just a couple of years ago, BHP boss Marius Kloppers was banking on the country to have 220 cities with more than a million residents each by 2030, requiring the cons0truction of tens of thousands of skyscrapers.

The mainland is the world's biggest importer of metals from copper to nickel and buys more than 60 per cent of the world's seaborne iron ore.

Iron ore is a key ingredient in steel, and the mainland produces half of the world's steel. Forecasting just how much steel any country will need is fraught with difficulty, given variables ranging from the growth of the economy to fixed-asset investment. It is a particularly hard task in a big, fast-growing developing economy like the mainland's, with its volatile economic cycles.

Still, CLSA thinks the mainland's steel consumption will grow at an average annual rate of 4.6 per cent between now and 2016. That's a sharp drop from the average annual 16.5 per cent clip it grew over the decade to 2010 and is about half last year's 9 per cent growth. Construction accounts for roughly half the country's steel use. The brokerage predicts that demand for steel will grow by less than 2 per cent annually, on average, this decade as the property market becomes 'more rational' following a building binge in 2009 and 2010 driven by government stimulus measures after the global financial crisis.

Beijing has since been curbing the overheated property market with such speculation-damping measures as restricting home ownership in many cities to no more than two dwellings. That has pinched developers, who are delaying housing starts.

Moreover, the government's big subsidised housing programme is lagging. China's most recent five-year plan, to 2015, calls for the construction of 36 million low-cost units, with 10 million units to be built last year and another 10 million this year. But the central government hasn't disbursed sufficient financing to local governments charged with implementing the programme. According to figures compiled by Liu Ligang, chief China economist of ANZ Bank in Hong Kong, in the first four months of this year, less than 18 per cent of the annual total earmarked for such housing was disbursed.

Even if the building programme were on schedule, it wouldn't provide a big fillip to steel consumption. That's because that type of low-cost housing requires less steel than privately built apartments. CLSA expects a decline in the construction of private flats, too.

What's more, it says steel consumption related to infrastructure has nearly peaked, because railways and roads are no longer being built at an accelerated pace. The severely oversupplied ship-building industry will also experience a decline in demand, CLSA said.

To be sure, demand for steel is growing rapidly in some areas, and that will help underpin iron ore prices. Beijing has fast-tracked some infrastructure projects, such as airports in the north of the country, that require steel and hence iron ore. Plus, the government has brought back subsidies for household appliances.

'We think the authorities' infrastructure-heavy response to slowing domestic growth will see a turnaround in iron ore's 13 per cent price decline since early April [when it peaked], as it has with the 7 per cent decline in domestic steel prices over the same period,' Liu said.

CLSA projects that between 2011 and 2020, the production of machinery used in construction and mining will grow at 5.2 per cent a year, outpacing the average annual growth in steel demand. The carmaking sector is projected to expand 5.3 per cent annually (compared with just 2.5 per cent last year), and the household appliances industry is predicted to post 6.1 per cent annual growth, even without accounting for any fillip from subsidies.

On a per capita basis, Vicky Binns, BHP Billiton's general manager of metallurgical coal marketing, expects China's annual steel consumption to peak at between 700kg and 750kg by about 2025, when per capita gross domestic product hits US$20,000.

In 2010, each person in China consumed 445kg of steel on average. By comparison, per capita steel consumption in Japan peaked at 800kg in 1990 and in the United States at 700kg in 1973.

CLSA commodities strategist Ian Roper, however, thinks China's steel consumption will peak as early as 2019 at about 600kg per person, or 850 million tonnes a year, implying a less optimistic scenario for iron ore demand.

Official projections are even more downbeat. The Ministry of Industry and Information Technology predicts steel demand on the mainland will peak at between 770 million tonnes and 820 million tonnes a year between 2015 and 2020, as a maturing economy requires less infrastructure to be built and more scrap steel is recycled, reducing the need for newly produced steel. Last year the mainland consumed 617 million tonnes.

Whenever it happens, the peaking of steel demand will be particularly bad news for the country's relatively high-cost mines. Roughly half the domestic output is extracted by small-scale producers with production costs of US$80 to US$180 a tonne, according to Roper.

'We believe long-run prices of US$70 a tonne will be seen by 2015 as all private Chinese mine supply is displaced by imports and Chinese iron ore consumption nears a peak due to slowing steel demand growth and rising scrap generation,' he wrote in a May research report. By comparison, iron ore on the spot market now trades at about US$135 a tonne.

Roper, a former head of iron ore research at mining giant Rio Tinto, expects imports, mainly from Australia, to account for nearly 90 per cent of China's needs in 2015, up from 68 per cent last year. Rio said last month it was counting on rising demand from China in the medium and long term and intends to proceed with a US$4.2 billion expansion in Western Australia's iron-rich Pilbara region and on a project in southeastern Guinea.