China's imports to keep rising
China's demand for seaborne imported coal used in steel smelting may rise 5 per cent annually in the next 15 years as the quality and quantity of domestic supply decline, according to Anglo-Australian global giant BHP Billiton.
China's average annual steel output growth is forecast by BHP to slow to 3.6 per cent in the next 15 years, compared with 11 per cent in the past six years. Growth averaged 7 per cent in the past two years.
'China's production growth of pig iron has exceeded that of domestic coking coal [used in steel production], so more imports are needed,' BHP general manager of metallurgical coal marketing Vicky Binns told the Coaltrans conference yesterday.
'We believe this import gap will widen in the future. Undoubtedly, some of this gap will be met by Mongolia, but seaborne coal will continue to be an important and sustainable part of the China steel raw material [supply] chain.'
Thanks to its relative proximity to the world's biggest steel-consuming nations in Asia, Australia's Queensland state supplies more than 60 per cent of the world's seaborne coking coal trade.
Mongolia, whose coking coal export to China grew by more than 30 per cent last year, is an upcoming major supplier, but has been limited by a lack of logistics infrastructure.
China's coking coal output grew an average 5 per cent a year in the past six years, behind that of steel production, as small, unsafe mines were closed down, upgraded or consolidated by bigger operators.
Binns' remarks came after BHP's president of iron ore Ian Ashby last month said China's steel demand growth would flatten as its big infrastructure build-up slowed.
Binns said despite the much lower growth rates, steel raw materials demand would continue to grow since the absolute level of steel demand was much higher than before.
BHP projected China's steel demand would not peak until at least 2025, when its per capita consumption was expected to reach 700 to 750kg, compared with 450kg now. Japan's steel consumption intensity peaked at 800kg per capita in 1990, while that of the US stopped rising at just over 700kg in 1973, Binns said.
CLSA commodities strategist Ian Roper said he agreed with BHP's view that China would need to import more metallurgical coal because of limited domestic supply, but he has a more conservative view on the country's steel demand. This was because China's economic growth would rely much less on fixed-asset investments in the next decade.
'China's workforce supply is peaking and people are getting more educated rapidly, which means we will see more white collar jobs, and not as many blue collar ones. The demographic shift is negative for fixed-asset investment growth,' Roper said.
He forecast China's steel demand growth to average 5 per cent for the next five years, and to be mostly flat thereafter.
Binns said metallurgical coal prices would be supported by rising costs, without giving any projections. She cited a UBS estimate that the average capital investment cost of 23 projects in different parts of the world has reached US$189 per tonne.
'A few years ago, projects over US$100 a tonne were quite rare, but now only a handful of projects are less than this figure,' she said.
Operating costs had risen by more than 10 per cent a year in the past five years, she added, citing estimates by Macquarie Securities.
A stronger Australia dollar, labour shortages, higher fuel and environmental protection costs, water shortages and heftier taxes all contributed to higher costs.
BHP has committed US$9 billion to expand existing coking coal mines and develop new ones. It had marketable resources of more than 2.4 billion tonnes, Binns said.