China’s struggles with its economy and softening global demand for steel are bad news for Australia’s largest export, iron ore, with analysts warning a dip in prices will hurt revenues of the major miners and the federal government.
“The world’s steel demand is flagging,” RBC Capital Markets analysts warn, arguing in a recent report that China’s faltering economic recovery and its lacklustre response to the threat will weigh on demand for steelmaking’s key ingredient.
China’s woes are intensifying concerns about demand for iron ore, which earned record prices for Australia’s major miners in 2021.Credit: CUHRIG
The bank’s investment arm has revised its global steel forecasts down by 0.5 per cent this year and cut its growth outlook for next year from 3.3 per cent to 1.9 per cent, citing weaker steel production and consumption amid increasing signs that China’s downturn is “structural rather than cyclical.”
“Leverage and liquidity issues continue to grow in China with more property developers facing bankruptcy, new loan numbers at decade-low levels and problems now spreading to the wealth management industry,” RBC said.
China Evergrande Group last week sought Chapter 15 bankruptcy protection in New York and the country’s largest property developer, Country Garden Holdings, is edging towards default on loans as real estate sales plunge across the country. Chinese authorities are grappling with a liquidity crisis at private wealth manager Zhongzhi, as the fallout from a deepening property slump spreads to the country’s $US2.9 trillion ($4.5 trillion) trust industry.
China’s woes are intensifying concerns about demand for iron ore, from which Australia’s major miners Rio Tinto, BHP and Fortescue Metals Group earned record prices in 2021. The commodity is Australia’s largest export, adding $41 billion to federal government taxes last year and underpinning Treasurer Jim Chalmer’s $4.2 billion budget surplus.
Barrenjoey head of mining research Glyn Lawcock said China aims to hold steel production flat at around a billion tonnes a year to avoid surpluses and contain prices. Production is running 2 per cent higher this year, Lawcock said. “They’re going to really slam on the brakes in the last four months.”
Rio’s boss Jakob Stausholm recently warned steel production in China is reaching a saturation point and will now begin to decline, with growth in iron ore demand coming instead from India and Asia. Stausholm insists Rio is in a stronger position than others to ride out any falls in commodity prices from weakening demand because of its lower operating costs.
Investors and the market will be keenly watching Australia’s largest miner, BHP, when it reports its full-year results on Tuesday, for any signs of further weakness from China.
China aims to hold steel production flat at around a billion tonnes a year.Credit: Bloomberg
Steel production rates are still healthy, which is why iron ore prices remain above $US100 a tonne, Lawcock said. The commodity was trading around $US107 a tonne last week.
However, Lawcock said the question everyone’s asking now is: “‘Where do we go next?’ Does the government come in and stimulate because the economy is in such bad trouble?”
Commonwealth Bank analyst Vivek Dhar said China’s property and infrastructure sectors account for up to 60 per cent of the country’s steel demand. Ballooning local government debt is reducing the Asian powerhouse’s ability to stimulate infrastructure demand and plummeting confidence in property is limiting efforts so far to boost that sector, he said.
Dhar said the CBA is forecasting iron ore prices of around $US100 a tonne during the last quarter of this year, dropping to around $US90 by the December quarter in 2024. ”These are still very high cash-flow generating assets,” he said. The federal budget forecasts a conservative iron ore price for 2024 of around $US76 a tonne.
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