CHINA’S steel industry has warned that iron ore prices will remain under pressure over the year ahead as the nation’s steel mills battle with over-capacity and weak demand.
“The iron ore price will remain on the downward track while the coal price may stabilise or rebound slightly,” said Yang Zunqing, deputy secretary of the China Iron and Steel Association.
Mr Yang told an OECD workshop in South Africa that despite the dive in the costs of raw materials, the Chinese steel industry was still struggling to break even, with the major mills suffering a fall in sales revenue in the first nine months. Prices received by the Chinese steel industry are the lowest since January 2003.
Mr Yang said industry output was expected to remain high, despite the fact that excess supplies were being pumped into an economy with weak demand, ensuring that finished steel prices remained weak.
Mr Yang said the industry faced the prospect of higher financing costs, adding that internal cash generation was inadequate, while financing on the sharemarket was difficult and the cost of both bond and bank financing was rising.
The industry is trying to redouble its level of steel exports, expected to have surpassed 80 million tonnes last year, to offset the lack of domestic demand. However, Mr Yang said trade frictions limited the scope for export markets.
Over the medium term, demand growth would be focused on high-end steel grades, while the medium to low end would be left battling excess capacity and escalating pressure for higher environmental standards.
Mr Yang said demand from the property sector would remain weak, with new property starts over the first nine months of the year down by 9.6 per cent from a year earlier. This is flowing through to sales of major household appliances. Washing machine sales are down 3.8 per cent while freezers are down 2.8 per cent.
The steel industry is more optimistic about infrastructure spending and shipbuilding. New orders in shipbuilding are 38 per cent higher in the first nine months than a year earlier. Motor vehicle sales are still growing, although at only 4.2 per cent it is at a much slower pace than the 10 per cent-plus growth rates that China had been used to.
A report by the Britain-based Commodities Research Unit said that while softening in the Chinese economy was contributing to the downturn in the market, it was not the main cause. “A surge of low-cost supply from Australia has been the principal driver dragging prices lower,” CRU analyst Laura Brooks said.
A softening in demand was confronting rapid growth in supply, principally from Australia. Australia’s share of global exports of iron ore has increased from 43 per cent to 51 per cent since 2012, while its share of metallurgical coal has grown from just under half to 56 per cent.
Ms Brooks said the gross margins of BHP Billiton and Rio Tinto were still in the 40-50 per cent range, but that they too would be looking to lower costs by maximising throughput.
On the demand side, CRU says growth in fixed-asset investment, the traditional driver of steel production in China, has dropped from the 20 per cent-plus rates maintained until mid-2013 to a little over 10 per cent.
But the firm is not expecting a crash in Chinese steel production or demand for iron ore and coal. Steel production is still expected to record growth averaging 2.6 per cent a year over the next five years, half the growth rate averaged over the past five years.
Zhejiang Yaang Pipe Industry Co., Limited