November 14, 2012 3:53 pm

Chinese steel demand set to pick up

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Firmer Chinese demand for steel and higher iron ore prices signal an improving market and suggest the worst may be over for the country’s troubled steel mills, according to China’s most prominent steel association.

The China Iron and Steel Association, a government-linked lobby group for the country’s biggest mills, said although half its members reported net losses during the first nine months of the year, it expected them to “turn around” and be able to report full-year profits for 2012 because of improvements in steel demand and prices.

“The main reasons are that steel demand has picked up gradually, steel mills have controlled production well and iron ore prices have fallen,” said Wang Xiaoqi, deputy head of the iron and steel association. “I’m also positive about the first quarter of next year.”

The association’s comments are closely watched because China is the world’s biggest consumer of iron ore, a key steelmaking ingredient that is essential to the profits of global miners such as BHP Billiton, Rio Tinto and Xstrata.

The stabilisation in Chinese demand has created a rebound in global iron ore prices, with the benchmark for iron ore delivered to China – with 62 per cent iron content – up 40 per cent since early September at $124.25 a tonne on Wednesday, according to Platts. That is the highest in nearly four months.

Beijing is trying to transform the Chinese economy into a slower, more sustainable growth engine and move away from the heavy industries such as steel and cement that consume a lot of resources and energy.

This transition, combined with a crackdown on the property sector, has lowered steel demand growth in China to a mere 2 per cent over the first nine months of this year, compared to double-digit growth over the past decade.

Chinese steel mills have been hit hard by the slowing demand growth and CISA said large and medium-sized plants reported combined net financial losses of Rmb5.5bn ($887m) in the first three quarters of this year, compared to a profit of Rmb84bn during the same period last year.

Lossmaking mills reported a total of Rmb26.7bn in losses during the first three quarters, more than 40 times the losses in the same period last year, the Iron and Steel Association said.

However, recent signals that the country’s steel demand is stabilising have given mills a cautiously optimistic outlook.

Mr Wang cited new railway and highway projects and rising fixed-asset investment as reasons why steel demand will pick up in the fourth quarter. Beijing has boosted railway investment for the year to Rmb630bn, from an earlier budget of Rmb516bn, contributing to steel demand.

The relatively smooth leadership transition under way in Beijing – where the Communist party will announce the new members of its most powerful council on Thursday – has also helped improve sentiment.

Sinosteel, a state-owned trading company that mines and trades iron ore, said it expects iron ore prices might go up in the fourth quarter.

“If the Chinese economy is OK and demand continues at its current levels, the [iron ore] price should be better in the fourth quarter than the third quarter,” said Luo Yongjun, vice-president of Sinosteel Mining Development Company, a subsidiary of Sinosteel Group, on the sidelines of a mining conference in Tianjin last week.

Analysts believe Chinese steel demand growth will stay in the single digits next year as economic growth continues around the 8 per cent level that the Chinese government has set as its target.

Additional reporting by Gwen Chen in Beijing

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