The end of quantitative easing, risks from geopolitics and international trade, as well as a growing awareness of environmental issues — are all affecting the Chinese iron ore and steel industries, according to the latest S&P Global Market Intelligence analysis presented at the 21st Annual Global Iron Ore & Steel Forecast Conference.
Maximilian Court, Senior Commodity Analyst at S&P Global Market Intelligence says: “China’s iron and steelmaking industries are experiencing difficulties as competition increases to determine industry champions. Supply-side reform is less encouraged by the industry’s current economics than by government policies, and these conflicting interests between government and business will have to be carefully managed by market agents over the near term.”
“We believe that short-term price expectations for mid-grade iron ore remain skewed to the downside. We see prices declining this year to an annual average of US$66/dmt CFR, and will continue to decline to an annual average price of around US$64/dmt CFR by 2020. We continue to expect large-scale volatility as premiums on higher-grade iron ore products are contested and environmental trends, trade tensions and interest rates continue to add uncertainty to the global iron ore market.”
Key conclusions from the analysis:
- Overall, China is transitioning from an engine of world steel production growth to a steady state with limited year-over-year growth – 0.6% growth in crude steel production is expected for 2018.
- Provincial disparity in terms of economic development and GDP per capita is a concern for China and presents a challenge for the demand environment.
- There continues to be a clampdown on steel mills in China’s Northern provinces yet rebar margins remain healthy at approximately US$117/t on March 20.
- China’s growing focus on environmental efficiency is improving steelmakers’ capacity utilization, yet production of iron ore run of mine (ROM) decreased by only 52 Mt year-over-year in 2017.
- China is making progress in restructuring its steel industry by cutting crude steelmaking capacity. However, the nation’s industry remains relatively fragmented — only 18% of the country’s steel was made by its the top five steelmakers in 2016.
- China’s infrastructure sector demands approximately 24% of its steel, which will require significant investment in raw materials’ consumption and, with the Belt and Road Initiative (BRI), is an incremental driver for raw materials demand for 2018 and beyond.
- As quantitative easing is unwound and the global credit environment begins to tighten, there will be increased competition for liquidity — a gradual closure of China’s credit gap will be key in maintaining steady consumption of raw materials.