In Commodity News 09/04/2015
Over the next decade-and-a-half steel demand will decline to 600 million tonnes a year in China, argues Australian economist Ross Garnaut. The forecast – which Garnaut outlines in commentary in the Australian Financial Review (AFR) – is starkly at odds with expectations by many analysts and major iron ore producers.
Conventional analysis tends to argue steel production in China will rise over the coming decade and beyond – albeit more slowly than in the past decade or so – to the billion tonne per year range or so by 2030, up from just over 800mt in 2014.
At the very least, analysts tend to see steel production being higher in the 2020s in China than today.
Making a bullish case for steel demand, Jimmy Wilson, the president of BHP’s iron ore division, recently concluded in a presentation: “We expect China’s crude steel production to peak at 1 to 1.1 billion tonnes in the mid-2020s and plateau through to 2030.”
But Garnaut argues the trend will go in the opposite direction, with steel production falling by some 200 million tonnes by 2030. He argues that with overall growth cooling in China – with targets in the 7% range, not the 10% range – and a changing type of growth away from capital intensive projects like railways and housing developments to a more consumer-focused economy, falling steel demand is inevitable.
“The fall in the ratio of investment to GDP leads inexorably to a large absolute fall in steel demand,” Garnaut writes in AFR. “This is the old-fashioned Keynesian accelerator at work. There will be new urban apartments, railway systems and airports to build – but fewer each year than when overall growth was higher.”
His analysis, which is light on details in the AFR article, relies on his contacts in China – where he was once Australia’s ambassador – for the 600mt figure.
“My Chinese friends from the 1980s include the technical and business leaders who in the past two decades guided the building in China of almost as much steel-making capacity as had accumulated in the rest of the world in the whole of industrial history,” Garnaut writes. “My old friends say that Chinese production should fall from a bit above 800 million tonnes today to about 600 million tonnes in 2030.”
Meantime he writes that there will be no rescuing steel demand – which drives iron ore demand – by growing economies elsewhere. They could have some effect, but it will be minor in Garnaut’s view.
Jessica Fung, a BMO Capital Markets commodities analyst, doubts the 600mt tonne future for Chinese steel production will be realised. She pegs Chinese steel production in 2025 at 875 million tonnes assuming about 1% growth per year.
She agrees China’s intensity of steel use and steel production should fall as the economy matures.
“If you want to be really bearish, China’s long-term demand should be around 450Mtpa, based on current per capita demand in the US,” Fung notes to Mineweb in an email. “Further, half of that demand could be filled through EAF (scrap processing) rather than BF (iron ore).”
She sees 600mt by 2030 as tough to arrive at, in part due to labour considerations.
“However, getting down to 600Mt by 2030 means cutting 25% of their domestic production in the next 15 years,” Fung says. “It’s not an impossible task, but that’s 300 000 workers that will lose their jobs from this one industry alone. (And) if steel production is down, so are construction jobs in manufacturing, equipment, etc.”
Further, she has higher hopes than Garnaut for growth in emerging markets, especially in Southeast Asia, to significantly balance iron ore production.
“These are countries with large populations as well, that require significant infrastructure built and will demand iron ore,” she says. “Not that it will help iron ore prices in the next few years – the majors are simply adding too much supply too quickly – but over the long term, the global market should become more balanced as other countries take over China as growth regions.”
