China will reach peak steel in 2015, after which its consumption and production of the metal will decline, according to researchers at Morgan Stanley.
This is likely to have a major impact on the iron ore industry, which relies on China as the primary offtaker from mines around the world, particularly when there are numerous large-scale facilities due to come online soon.
The iron ore industry has long been engaged in efforts to predict when Chinese demand for the mineral will begin to taper off, but few have predicted it to come so soon.
The bank’s prediction coincides with the Chinese government’s efforts to re-adjust the economy from an investment-based model to a consumption-based one, and arrives a week after China announced its lowest GDP growth since 1990.
The authors write: “We now expect 2015 to represent the peak in Chinese steel consumption and production. While we do not expect volumes to collapse, we think growth will shift to negative as the country matures away from heavy fixed-asset investment growth.”
Other predictions differ: the bank Goldman Sachs estimates peak steel to take place post-2018, while iron ore producers are more bullish still, forecasting peak steel to be a decade away, at the earliest.
A spokesperson for BHP Billiton, one of the world’s largest mining companies, tells GTR that the company refutes the claims and is content that demand for their minerals will remain strong.
This correlates with comments made by the company’s president of iron ore Jimmy Wilson, who said recently: “We have spoken previously about our outlook for steel demand in China to peak at between 1 and 1.1 billion tonnes around the early to mid-2020s. An increasing proportion of that will be for replacement steel, as more of the infrastructure and equipment that was added to the economy over the past decade begins to reach the end of its useful life.
“As the steel contained within it gets released, an increasing proportion of steel production will be met by scrap, rather than the pig iron that requires iron ore. This combination of slowing growth in steel demand, and more of that steel being met by scrap, can be expected to lead to a decline in demand for seaborne iron ore, after it reaches a peak in the early to mid-2020s. This is consistent with the outputs that we have spoken about previously.”
China currently consumes around 60% of the world’s supply of iron ore and with no country in a position to replace this demand, a permanent downward trajectory in its consumption would have a big deflationary impact on prices, hitting producers and banks in the process.
Officials in China have been quite frank about their expectation that China’s demand for steel-related products will fall – and indeed, is falling. Speaking toReuters last year, the chairman of Shandong Shihent Special Steel, Zhang Wuzong, said: “You can basically say that Chinese steel output has reached a peak.”
These thoughts are echoed by the president of the China Metallurgical Industry Planning Association, Li Xingchuang, who dismisses the predictions of miners, saying: “I really don’t understand how the big mining companies made that forecast. Consumption is really near the peak.”
Countries which produce large amounts of iron ore – such as Australia – will be particularly concerned by the forecast. In the week in which it announced that it had more than halved the national trade deficit last month, the Australian government was accused of manipulating the dollar in an effort to support iron ore exporters, who stand to lose out significantly by the terminally low price. By lowering the value of the Australian dollar, the government might have hoped to make Australian-made ore more attractive to overseas buyers.
The CEO of Cliffs Natural Resources, Lourenco Goncalves, tells the Sydney Morning Herald: “The Australians have very little do at this time beyond continuing to manipulate their currency. Despite that we are already seeing lay-offs and mines shutting down throughout the entire Australian iron ore mining landscape.
“The Australians are taking no prisoners with the Aussie dollar. They want to help BHP, they want to help Rio Tinto, they want to help that lady over there, Gina [Rinehart, the owner of Hancock Prospecting, which operates the giant Roy Hill mine in Pilbara] whatever. They are going to continue to help Fortescue Metals Group and they will believe that they will always crush Chinese producers. Big mistake, but it is what it is.”
Australian producers are heavily reliant on Chinese demand and have entered into numerous high-profile partnership agreements. Late last year, for instance, the mining giant Rio Tinto agreed to enter a joint venture with Sinosteel Corporation, to extend the Channar iron ore mine, also in Pilbara.
That the signing of the agreement was attended by Chinese President Xi Jinping and Australia’s Prime Minister Tony Abbott highlights the mutual dependence of each country on the other.
Written for GTR