June 9, 2013 8:58 pm

Ansteel braced for ‘long-term struggle’

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Iron ore prices will fall dramatically during the second half of this year due to sluggish steel demand in China, the head of Anshan Iron and Steel, China’s fourth-largest steelmaker by output, has predicted in a rare and candid assessment.

Zhang Xiaogang, Ansteel chairman, told the Financial Times he expected the average iron ore price for this year to be around the current level of $110 to $120 a tonne, implying that prices would continue their downward slide.

The slowdown in China’s economy, which is growing at its slowest pace in more than a decade, has hit steelmakers hard due to overcapacity in steelmaking and weak demand for steel, which is used in everything from skyscrapers to kitchen appliances and cars.

Benchmark prices of iron ore, a key steelmaking ingredient, have already fallen more than 30 per cent from their February high of $158.9 per tonne to reach $110.90 on Friday, according to the Steel index.

Citing academic studies, Mr Zhang said the Chinese steel industry – which has been reporting heavy losses during the past year – could take five to seven years to return to strong profitability. China is the world’s biggest steelmaker, accounting for half of global production.

“We have to prepare for a long-term struggle,” he said.

“Some people will collapse during this war of attrition, if their cash flow dries up, or if they can’t make any money at all.”

Mr Zhang said the heady profits steel mills had five years ago led to the current glut in capacity. “Those lucrative years are gone for good; they will never come back,” he said.

Until the weaker steelmakers are forced out and overcapacity is eliminated, steelmakers including Ansteel will waver between small profits and small losses, Mr Zhang said.

This bleak financial outlook will limit Chinese steelmakers’ ability to make big investments overseas, he said.

Steel demand has been particularly poor in sectors such as shipbuilding and container manufacturing, due to the slowing Chinese economy as well as cooling demand for Chinese exports from Europe and the US. Chinese exports grew just 1 per cent in May compared with the previous year, down from 14.7 per cent growth in April.

However, Mr Zhang pointed to some pockets of growth for steel demand – such as home appliances, vehicles and construction – that can be attributed to China’s urbanisation and rising income levels.

Iron ore prices are crucial to the profits of mining companies such as BHP Billiton, Rio Tinto and Vale. Concerns over falling Chinese demand have already prompted several of the biggest mining companies to start selling off non-core assets.

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