By Thomas Biesheuvel and Jesse Riseborough Nov 19, 2014
Bloomberg
Chinese President Xi Jinping obviously wasn’t speaking for the world’s iron-ore producers when he pronounced this month that the risks from his country’s slowing growth “aren’t that scary.”
The world’s mining giants have wagered $120 billion that steel production in China won’t peak until as late as 2030. Increasingly, it looks like they got that wrong, a miscalculation that could have huge consequences for companies led by BHP Billiton Ltd. (BHP) and Rio Tinto Group.
“I’ve always taken the view that the miners had the best intelligence on this as large investment decisions are based on it,” Richard Knights, a mining analyst at Liberum Capital Ltd. said by phone. “But if they get it wrong by a just a small margin, that has major implications for profitability and the share price for years to come.”
Iron ore is the worst-performing commodity this year, reaching a five-year low yesterday, and the slowing economy has persuaded some analysts and steelmakers that peak steel is nearing in China, the world’s largest producer.
Output in China will reach its high-water mark in as little as three years, prompting plant closures rather than expansions, according to Wolfgang Eder, chairman of the World Steel Association and chief executive officer of Voestalpine AG, Austria’s biggest steelmaker.
“There has to be a restructuring of the Chinese steel industry,” Eder said. “The iron-ore producers are getting more and more aware that their growth expectations have to be redefined. There are enormous over-capacities and more is coming on stream. This will increase the pressure.”
Big Change
It’s a big change. Every year for the past decade, China has added new mills with the capacity to exceed the annual production of Germany, the largest steelmaker in Europe. The surge in new blast furnaces created a consumption vortex, swallowing half the world’s iron ore and creating unprecedented wealth from Australia’s Pilbara region to Brazil’s Amazon basin. That gravy train, generating annual iron-ore sales of about $160 billion last year, is slowing.
The major flaw of producers of iron ore, the most traded commodity after oil, is they tend to be “over-bullish,” said Kirill Chuyko, head of equity research at BCS Financial Group in Moscow.
“Humans make mistakes,” said Chuyko, who thinks peak steel has been reached. “Chinese demand is going south.”
Economy Slowing
As China, the world’s second-biggest economy, heads for the weakest expansion in more than two decades, Communist Party leaders have discussed paring the growth target for 2015, according to a person with knowledge of their talks. The prospect growth will keep slowing has hurt commodities prices from coal to crude oil.
Iron ore has dropped 47 percent to $71.80 a ton this year, the lowest since 2009, according to Metal Bulletin Ltd. Citigroup Inc. forecast the commodity could fall below $60 a ton next year. It peaked at $191.70 in February 2011.
Spokesmen for BHP and Rio declined to comment.
The iron-ore market shifted to a “structural” surplus in mid-2014, Goldman Sachs Group Inc. analysts Fawzi Hanano and Eugene King said in a Nov. 6 report. That excess will widen to almost 300 million metric tons by 2017, they said. Miners led by BHP and Rio have embarked on $120 billion of spending on new mines since 2011.
A total of 24 iron-ore projects have either started or been approved since 2011, according to Goldman Sachs. The mines have a combined annual capacity of 726 million tons and include operations in Australia, Brazil, Sierra Leone, Canada, Russia, Ukraine and Liberia.
Steel Growth
BHP lowered its expectations for Chinese steel growth last month, though it still expects the country to increase production 25 percent by 2020-2025 to 1 billion tons to 1.1 billion tons. Rio expects China’s output to reach 1 billion tons by about 2030.
BHP and Rio operate in the iron-rich Pilbara region of Western Australia, the world’s largest production hub. Rio plans to boost output 11 percent this year to 295 million tons, rising to at least 330 million tons from 2015. BHP is increasing production from the region to about 245 million tons in the 12 months through June.
BHP fell 1.6 percent to 1,633 pence by 9:07 a.m. in London, while Rio declined 1.8 percent to 2,949 pence. Fortescue Metals Group Ltd. (FMG), Australia’s third-largest shipper, lost 7.7 percent in Sydney for the lowest close since June 2009.
Seaborne Trade
Global seaborne iron ore surged almost fourfold in the past decade to 1.2 billion tons last year, according to Bloomberg Intelligence, which predicts a further increase to 1.65 billion tons by 2018. For each ton of steel production, 1.6 tons of iron ore is needed.
“The seaborne iron-ore market has already transitioned to a structural surplus, which we expect to grow as slower growth in Chinese steel production is met by continued record growth in seaborne iron-ore supply, mainly from incumbent low-cost producers,” the Goldman analysts wrote.
While construction of the world’s biggest bridge, longest high-speed rail line and the growth of over 140 cities with more than 1 million inhabitants saw Chinese steel output more than triple to 786 million tons in the 10 years to 2013, industry pundits wonder whether the unprecedented scale of China’s industrialization can be maintained.
Property Slump
China’s bad loans climbed in the third quarter by the most since 2005, while new-home prices declined, according to data this week, spurring speculation the cooling economy will weaken further. China’s new-home prices dropped in all but one city tracked by the government in October from a month earlier, the National Bureau of Statistics said yesterday.
Chinese steelmakers, including the 11th-largest, Hunan Valin Iron & Steel Group, are cautious with the economy on course for its lowest growth rate since 1990 as property slumps and investment slows.
“Steel demand will maintain a small pace of growth for possibly three to five years,” said Li Jianguo, general manager of Hunan Valin. “I wouldn’t say the growth will last over the next decade.”
In the absence of demand growth, mills need to address a domestic supply “glut,” according to the China Iron and Steel Association, which sees the nation’s capacity at 1.1 billion tons to 1.4 billion tons. China, which produces half of the world’s steel, is on course to export a record 80 million tons this year.
“We have global over-capacity in steel production,” said Eder of Linz, Austria-based Voestalpine. “We cannot expect further growth in steel capacity.”
Bloomberg
Chinese President Xi Jinping obviously wasn’t speaking for the world’s iron-ore producers when he pronounced this month that the risks from his country’s slowing growth “aren’t that scary.”
The world’s mining giants have wagered $120 billion that steel production in China won’t peak until as late as 2030. Increasingly, it looks like they got that wrong, a miscalculation that could have huge consequences for companies led by BHP Billiton Ltd. (BHP) and Rio Tinto Group.
“I’ve always taken the view that the miners had the best intelligence on this as large investment decisions are based on it,” Richard Knights, a mining analyst at Liberum Capital Ltd. said by phone. “But if they get it wrong by a just a small margin, that has major implications for profitability and the share price for years to come.”
Iron ore is the worst-performing commodity this year, reaching a five-year low yesterday, and the slowing economy has persuaded some analysts and steelmakers that peak steel is nearing in China, the world’s largest producer.
Output in China will reach its high-water mark in as little as three years, prompting plant closures rather than expansions, according to Wolfgang Eder, chairman of the World Steel Association and chief executive officer of Voestalpine AG, Austria’s biggest steelmaker.
“There has to be a restructuring of the Chinese steel industry,” Eder said. “The iron-ore producers are getting more and more aware that their growth expectations have to be redefined. There are enormous over-capacities and more is coming on stream. This will increase the pressure.”
Big Change
It’s a big change. Every year for the past decade, China has added new mills with the capacity to exceed the annual production of Germany, the largest steelmaker in Europe. The surge in new blast furnaces created a consumption vortex, swallowing half the world’s iron ore and creating unprecedented wealth from Australia’s Pilbara region to Brazil’s Amazon basin. That gravy train, generating annual iron-ore sales of about $160 billion last year, is slowing.
The major flaw of producers of iron ore, the most traded commodity after oil, is they tend to be “over-bullish,” said Kirill Chuyko, head of equity research at BCS Financial Group in Moscow.
“Humans make mistakes,” said Chuyko, who thinks peak steel has been reached. “Chinese demand is going south.”
Economy Slowing
As China, the world’s second-biggest economy, heads for the weakest expansion in more than two decades, Communist Party leaders have discussed paring the growth target for 2015, according to a person with knowledge of their talks. The prospect growth will keep slowing has hurt commodities prices from coal to crude oil.
Iron ore has dropped 47 percent to $71.80 a ton this year, the lowest since 2009, according to Metal Bulletin Ltd. Citigroup Inc. forecast the commodity could fall below $60 a ton next year. It peaked at $191.70 in February 2011.
Spokesmen for BHP and Rio declined to comment.
The iron-ore market shifted to a “structural” surplus in mid-2014, Goldman Sachs Group Inc. analysts Fawzi Hanano and Eugene King said in a Nov. 6 report. That excess will widen to almost 300 million metric tons by 2017, they said. Miners led by BHP and Rio have embarked on $120 billion of spending on new mines since 2011.
A total of 24 iron-ore projects have either started or been approved since 2011, according to Goldman Sachs. The mines have a combined annual capacity of 726 million tons and include operations in Australia, Brazil, Sierra Leone, Canada, Russia, Ukraine and Liberia.
Steel Growth
BHP lowered its expectations for Chinese steel growth last month, though it still expects the country to increase production 25 percent by 2020-2025 to 1 billion tons to 1.1 billion tons. Rio expects China’s output to reach 1 billion tons by about 2030.
BHP and Rio operate in the iron-rich Pilbara region of Western Australia, the world’s largest production hub. Rio plans to boost output 11 percent this year to 295 million tons, rising to at least 330 million tons from 2015. BHP is increasing production from the region to about 245 million tons in the 12 months through June.
BHP fell 1.6 percent to 1,633 pence by 9:07 a.m. in London, while Rio declined 1.8 percent to 2,949 pence. Fortescue Metals Group Ltd. (FMG), Australia’s third-largest shipper, lost 7.7 percent in Sydney for the lowest close since June 2009.
Seaborne Trade
Global seaborne iron ore surged almost fourfold in the past decade to 1.2 billion tons last year, according to Bloomberg Intelligence, which predicts a further increase to 1.65 billion tons by 2018. For each ton of steel production, 1.6 tons of iron ore is needed.
“The seaborne iron-ore market has already transitioned to a structural surplus, which we expect to grow as slower growth in Chinese steel production is met by continued record growth in seaborne iron-ore supply, mainly from incumbent low-cost producers,” the Goldman analysts wrote.
While construction of the world’s biggest bridge, longest high-speed rail line and the growth of over 140 cities with more than 1 million inhabitants saw Chinese steel output more than triple to 786 million tons in the 10 years to 2013, industry pundits wonder whether the unprecedented scale of China’s industrialization can be maintained.
Property Slump
China’s bad loans climbed in the third quarter by the most since 2005, while new-home prices declined, according to data this week, spurring speculation the cooling economy will weaken further. China’s new-home prices dropped in all but one city tracked by the government in October from a month earlier, the National Bureau of Statistics said yesterday.
Chinese steelmakers, including the 11th-largest, Hunan Valin Iron & Steel Group, are cautious with the economy on course for its lowest growth rate since 1990 as property slumps and investment slows.
“Steel demand will maintain a small pace of growth for possibly three to five years,” said Li Jianguo, general manager of Hunan Valin. “I wouldn’t say the growth will last over the next decade.”
In the absence of demand growth, mills need to address a domestic supply “glut,” according to the China Iron and Steel Association, which sees the nation’s capacity at 1.1 billion tons to 1.4 billion tons. China, which produces half of the world’s steel, is on course to export a record 80 million tons this year.
“We have global over-capacity in steel production,” said Eder of Linz, Austria-based Voestalpine. “We cannot expect further growth in steel capacity.”
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