--Clyde Russell is a Reuters columnist. The views expressed
are his own.--
By Clyde Russell
LAUNCESTON, Australia, May 13 Can Chinese
steelmakers and global iron ore miners both be right about the
future, even though they appear diametrically opposed?
The Chinese steel industry says it has stopped expanding and
is facing major problems amid a slowing economy.
Global iron ore miners are boosting seaborne supplies of the
steelmaking ingredient by about 20 percent over the next two
years and believe China will buy most of the extra cargoes.
It appears that both steelmakers and miners can't be right,
but as counterintuitive as it sounds, steel capacity can stop
increasing even as iron ore imports experience robust growth.
Take the Chinese steel industry first.
"Companies are no longer expanding capacity," Wang Xiaoqi,
vice president of the China Iron and Steel Association (CISA)
told an industry conference in Singapore last week.
In fact, some older and inefficient plants are being closed,
with 28.7 million tonnes of annual capacity slated to end
operations this year.
As CISA points out, however, China will still have
significant surplus capacity even as outdated and polluting
plants are shut down or idled.
China's steel output was a record 779 million tonnes in 2013
and CISA forecasts it will reach 810 million tonnes this year,
growth of about 4 percent.
But the Chinese steel industry still has close to another
200 million tonnes of capacity on top of that, meaning it could
increase production substantially in the next few years without
any additional investment.
And even if Beijing's war on pollution proves effective,
China will still likely suffer from excess steel capacity for
years to come.
Northern Hebei province, China's largest steelmaking region,
announced plans last September to cut 60 million tonnes of
annual capacity by 2017 as part of efforts to tackle pollution
and the sector's surplus.
That would, if achieved, still leave more than 140 million
tonnes of spare capacity at 2014 production levels, meaning
Chinese steel output could grow as much as 4 percent per annum
for the next four years before any constraints emerge.
Whether the Chinese economy would need this much steel is
debateable, given the slowdown in residential construction,
which accounts for about a quarter of steel demand.
The shift in the economy to lower, consumer-led growth rates
is likely to cause steel demand growth to ease as well, although
given the likely pace of urbanisation over the next decade, it's
unlikely steel consumption will decline.
This expected modest growth in steel demand probably will
not be able to absorb all the extra iron ore supply coming to
the market in the next few years.
PRICE IS KEY TO FUTURE IRON ORE IMPORT GROWTH
The annual global seaborne iron ore market is about 1.2
billion tonnes, with China accounting for 820 million tonnes, or
about 68 percent, in 2013.
Up until recently the market has been in deficit, helping to
explain why spot Asian iron ore prices .IO62-CNI=SI went from
$59.60 a tonne when Steel Index begin compiling data in November
2008, to as high as $191.90 a tonne in February 2011.
Prices have been more modest since, falling from end-2013
values of around $140 a tonne as increased supplies hit the
market and questions have been raised over Chinese demand.
The decline so far this year has been more than 23 percent
to $103 a tonne on Monday.
Global miners will add a total of 240 million tonnes of iron
ore output this year and next, Claudio Alves, global director
for marketing and sales at top iron ore miner Vale,
said at the Singapore conference last week.
Brazil's Vale is lifting its annual output to 450 million
tonnes after 2018 from 306 million tonnes last year, joining
Australian giants BHP Billiton and Rio Tinto
in boosting supply.
The increase in supply begs the question as to whether the
global miners and smaller competitors have got it wrong and
China won't be able to absorb the additional ore.
On the surface it would seem they have miscalculated
somewhere. Even optimistic scenarios for Chinese steel output
growth wouldn't justify the iron ore capacity under construction
or in the final stages of planning.
But the one key factor that may change everything is price.
Chinese domestic iron ore output meets about a quarter of
the domestic steel industry's requirements.
While Chinese mines produced 1.45 billion tonnes of iron ore
in 2013, this is of low quality, with an iron content of about
22 percent. Brazilian and Australian ore is closer to 60
This makes Chinese ore expensive to mine and more polluting
to use, and increasingly uncompetitive if the spot price drops
below $100 a tonne.
Global miners are basically gambling that China will be
happy to substitute imported ore for domestic ore in coming
years. The bet may pay off, but there are caveats.
First, the spot price won't be able to rise to levels that
make Chinese domestic output competitive, currently this is
around $120 a tonne. If the price falls into a stable $80-$100 a
tonne range, this would be positive for import growth and
negative for Chinese domestic ore output.
Second, the Chinese must continue to act on pollution, as
this will encourage the use of higher grade iron ore, given that
it uses less coal when made into pig iron and steel.
Lastly, global miners need unfettered access to China's iron
ore market, and they must hope that the authorities are willing
to see local mines close and reliance on imports increase.
(Editing by Tom Hogue)