Iron ore steels for a fall as China growth eases

Iron ore prices have staged a strong rebound since falling last autumn to their lowest level since the global financial crisis in 2009, but analysts expect prices to edge moderately lower in the next few years on slow Chinese demand and addition of new supply. The key swing factor for prices is the degree to which new mining projects are cut back, delayed or cancelled. On the demand side, analysts generally agree that China's iron ore consumption is unlikely to return to the high growth rates of the past. "The broader market … is coming to the conclusion that the 'super-cycle' which characterised many metals and materials markets over the past decade is now over," a Deutsche Bank research report said. "China is approaching a maximum in terms of consumption intensity for steel." The broader market … is coming to the conclusion that the 'super-cycle' which characterised many metals and materials markets over the past decade is now over The investment bank's analysts expect China's steel output growth to pick up to 5 per cent this year from 4 per cent last year, but fall to 2 per cent next year and in 2015. Their view was echoed by industry consultancy AME Group chairman Shaun Browne, who projected output to grow an average 3.4 per cent per year between 2010 and 2020, down from 15.2 per cent in the previous decade. He made the projection at the Mines and Money conference in Hong Kong last month. "The days of China endlessly controlling all of the world's iron ore demand growth are ending," Browne said. Prices of imported ore with 62 per cent iron content at the Tianjin port hit a16-month high of US$158.50 a tonne on February 20 after rising from a trough of US$86.70 in September. But prices have since declined, with the commodity trading at about US$140 since late last month. The China Iron and Steel Association said early this month that iron ore prices would likely trend down further over the year, as steel production growth was expected to fall from a strong 10.6 per cent seen in the first two months of the year. Association vice-chairman Liu Zhenjiang said late last month that lower output was inevitable, given steel inventory at steel mills and traders' warehouses stood at record highs, and profitability was deteriorating. The entire industry's profit fell to 998 million yuan (HK$1.24 billion) in February from 1.34 billion yuan in January, Liu said, adding that despite surging iron ore prices, steel mills failed to cut back on production to protect their bottom line. "It was as if we were fighting against ourselves," he said. Liu warned that industry-wide losses seen last year could return, adding that around a third of producers made losses in January. Browne expected demand growth for Chinese iron ore to start falling this year and continue to do so until at least 2017, given imports were expected to keep rising as local ore grades deteriorated and losses cost competitiveness. Production costs at most local mines range between US$100 and US$125 per tonne, making the operations vulnerable to losses when prices fall. But Browne said some small uneconomic domestic mines could take longer than expected to shut down given their role in providing employment, while others were "surprisingly efficient" thanks to technology and good management. Still, as time passed, the already low ore grade of domestic mines would fall further, forcing the shutdown of more mines, he added. Browne projected that the four big Australian and Brazilian iron ore miners, which together account for about 55 per cent of global output, would still account for half of that production in the next five to seven years. IRC, an iron ore miner in Russia's Far East, is joining in to displace the market share of Chinese miners. The company, which aims to produce 900,000 tonnes this year, plans to quadruple output by 2015 by adding a new mine at an estimated construction cost of US$500 million. IRC has secured commitments from Minmetals Cheerglory, a Hong Kong subsidiary of state-owned China Minmetals, the nation's largest steel trader, and General Nice Development, China's largest privately owned steel smelting raw materials trader, to buy its shares and output from its new mine. IRC chairman Jay Hambro said the new mine's low production cost and proximity to China meant its cash-production-plus-transport cost to the Chinese border would total US$60 a tonne. Including depreciation cost of about US$4 a tonne, he said its output would remain competitive to Chinese ore and ore from Australia and Brazil, even if prices fell. Deutsche Bank forecast in January that the spot-market iron ore price at Chinese ports would average US$125 a tonne this year, falling to US$115 next year and US$110 in 2015. Despite analysts' forecasts of flattish steel production growth in China, General Nice Group vice-president of projects and planning Rahul Goel said growth from India and the Middle East would help offset slower growth in China, noting that India had turned into a net importer from an exporter recently. The Deutsche Bank report said the conviction that China's demand growth would be slow could cut supply-side growth meaningfully over the next few years "as producers, big and small, curtail, defer, or cancel iron ore projects".

Iron ore steels for a fall as China growth eases

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Analysts see lower prices ahead for the mineral with the super-cycle turning into more moderate rates of expansion in mainland demand

Analysts see lower prices ahead for the mineral with the super-cycle turning into more moderate rates of expansion in mainland demand