Miners who thought they had weathered the worst of the summer’s commodity rout have reason to be fearful again. Copper is back below $5,000 a tonne, zinc has hit a six-year low and iron ore, which appeared to defy gravity in August as China’s economy sputtered, has come back to earth with a bump.
That is bad news for BHP Billiton, Rio Tinto and Vale, which have ploughed billions of dollars into expanding their production of iron ore, the key steelmaking ingredient, in an effort to capitalise on China’s once insatiable appetite for raw materials.
Concerns are now mounting that China’s steel production may have peaked and its demand for iron ore is set to wane.
“The next leg down in iron ore will be the reversal of Chinese imports, which have been remarkably stable in the face of weak domestic demand, helped by dumping excess steel on international markets,” say analysts at Liberum, a London-based brokerage.
Over the past month the price of benchmark Australian ore for immediate delivery into China has fallen by almost 15 per cent, according to price assessments by The Steel Index. While the commodity has stabilised in recent days at about $47 a tonne, following a deadly accident at a Brazilian iron ore mine, it is close to a 10-year low and set for a third-consecutive year of losses.
Since peaking at $190 a tonne in 2011, iron ore has tumbled by 75 per cent as a flood of new supply from low-cost mines in Australia and Brazil has hit the market. Now investor attention is switching to the demand side of the equation — the least well understood part of the market.
China is the biggest consumer of seaborne iron ore, buying around two-thirds of the world’s production to feed its giant steel industry. Many believe China’s mills, which account for about half of global output, will pour less metal in the future as the country moves to a more consumer-driven economy. In other words China has reached “peak steel”.
“The only groups who have not yet acknowledged that steel production in China peaked in 2014, and is now set to slide, are the major iron ore producers,” say analysts at Investec Securities in a recent note. “[They] are largely sticking to their long-term demand predictions like drowning men clinging to a matchstick.”
While BHP recently revised its estimates, it still believes Chinese steel production will rise about 20 per cent in the next 10 years to between 935m and 985m tonnes. Rio thinks output will reach 1bn tonnes by 2030.
Analysts and some industry bodies have a different view. Macquarie expects Chinese steel output will fall from its 2014 production estimate of 840m tonnes. The China Iron & Steel Association (CISA) also sees output falling, to 780m by 2020, as demand slows and often heavily indebted mills battle lower domestic demand and slumping prices.
The latest Chinese data point to waning demand. According to the National Bureau of Statistics, steel output for the 10 months of the year was 675m tonnes, down 2.2 per cent from the same period a year ago. Over the same period iron ore imports totalled 774.5m tonnes, unchanged from 2014.
“China’s steel mills are realising negative margins of approximately $50 a tonne,” Noble Group, another large commodity trader, said on Thursday as its reported third-quarter results. “This, coupled with the forthcoming deceleration in construction activity, makes a decline in crude steel production rates highly probably, which in turn will reduce raw materials demand.”
Steel consumption, meanwhile, dropped 5.8 per cent to 533m tonnes between January and September, due to weak demand in end markets such as construction, infrastructure and automotives.
“China is still going to consume a lot of steel but it doesn’t necessarily have to consume more than it did the year before,” says Graeme Train, senior economist at Trafigura, one of the world’s largest trading houses.
“There could be a bigger number a couple of years down the line if there is a cyclical upturn in the economy. But in terms of continued growth trends, I think that’s a much harder case to argue now.”
China has been able to consume more than it produces this year by pushing metal into other markets. But this has led to tensions. Earlier this week, EU member states called on Brussels to deploy “the full range” of its trade defence instruments to support the region’s embattled steel industry against cheap Chinese imports.
If the export market starts to shrink it will place more pressure on China’s larger mills, which CISA says piled up more than $4bn of losses in the first nine months of the year as they struggled with the first slowdown in domestic demand for a generation.
Melinda Moore, head of bulk commodity sales and strategy at ICBC Standard Bank, says one of the big themes for next year will be whether state-owned mills continue to be funded because of China’s “employment imperative”, or whether losses grow so large that market forces are allowed to take over.
For the moment, it is largely seasonal factors — and port stocks creeping higher — weighing on the iron price. After the peak summer period, activity in China’s steel industry slows down in September and October, hitting prices, before a pre-winter restock by traders provides some support at the end of the year.
That pattern could be repeated this year, helped by the reduced supply from Brazil following the disaster at the Germano mine, say traders.
But few market participants see the price moving much beyond $50 over the next 12 months. Andrew Forrest, the perennially bullish chairman of Fortescue Metals Group — the world’s fourth biggest iron ore supplier — said after the company’s annual shareholder meeting this week that the steelmaking ingredient would trade in the $40s for a while.
Source: http://www.ft.com/