Much has been made lately of China's slowing economic growth and the resultant belief that commodity prices are likely to slow too.
And, while companies like BHP Billiton – which have built fortunes on the back of Chinese growth and its subsequent demand for coal and iron ore – have made a point of managing expectations not only of future growth but also of prices, it is important to remember that, while Chinese economic growth is slowing, the base has changed dramatically.
Indeed, as Standard Chartered points out in a recent, comprehensive note of the Chinese steel sector, while no market can grow forever, even with per capita growth heading downward, there are a number of factors at play that suggest Chinese steel consumption will not peak until 2025.
Indeed, it says, China's annual steel consumption growth has already peaked and will slow to less than 1% between 2021 and 2025.
"But even with flatter future growth than the past decade, the additional consumption in volume terms remains substantial due to a high base. For example, total steel consumption will increase by 155mt between 2013 and 2025 (+23%). Between 2014 and 2025, our base-case scenario suggests average growth of 1.3% y/y. There will be virtually no increase in steel consumption in the peak year of 2025."
Part of the reason for this belief stems from three basic assumptions on the part of the bank:
"1. The future path of China's per-capita steel consumption will track the trajectory of major economies.
2. China's long-term real GDP growth will gradually trend down and stabilise at 4% y/y towards 2030.
3. We use UN estimates for China's population. Population growth is forecast to decelerate in the years leading up to 2030, reaching 1.46bn people by 2030."
But, while these assumptions all point to lower growth, they also point to a very robust base of demand.
"The trajectory for China's per-capita steel consumption derived from our regression analysis of various countries shows that 2012 consumption, at 487kg, is already close to the peak of 569kg we forecast between 2022 and 2023. Our analysis also suggests that between 2012 and 2020, per-capita consumption will increase by 16%. But between 2020 and 2025, there will be virtually no growth in per-capita use, while total steel consumption will continue to rise on the back of population growth," it says.
The implications for iron ore
Standard Chartered believes this continued, albeit slower demand for steel in China, as well as the restructuring of the sector that must accompany it, will support iron ore demand in the longer-term.
The bank believes that iron ore demand from the Asian giant will peak at 775mt (measured by Fe content) in 2020.
But, it says, imports should peak at 989mt (rock weight) in 2025.
"Imports are a critical influence on future iron ore price trends. We expect China's dependence on imported iron ore to increase further in the long term due to declining domestic ore grades."
But, it says, if steel producers, as part of the country's restructuring, move away from a reliance on basic oxygen furnaces (BOF) which require more iron ore toward scrap-friendly electric arc furnaces (EAF) this may cap somewhat its dependence on imports.
This view of iron ore demand is based, Standard Chartered says, on three assumptions:
"(1) we assume that China's long-term steel demand will be met primarily by domestic production;
(2) steel output contributed by BOFs should gradually decline over time, along with the increasing availability of scrap for EAFs as recycling activities grow with economic development;
(3) 1.6t of iron ore is required for each tonne of steel output, assuming an iron ore grade of 62%."
In terms of domestic production, the bank believes it unlikely that there will be a significant growth in output, although it is quick to add that falling ore grades always imply that higher output is required.
"We forecast average output growth of 11% y/y between 2012 and 2015, but expect domestic iron ore production to start to trend down from 2016."
The implications for prices
While over the long-term Standard Chartered is bullish on iron ore prices, it is less positive over the short-term as a result of the current weakness within the global economy.
""We have also lowered our price forecasts for 2013 to USD 135/t from USD 182/t, for 2014 to USD 125/t from USD 180/t, and for 2015 to USD 115/t from USD 133/t, to reflect downward revisions to China's imports."
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