Will of iron

China’s bellwether metal production industries are running at a cash loss as the economy slows and the central government withdraws emergency support for the steel and other industries that it put in place during the 2008 financial crisis.

Despite the 15 per cent fall in commodity prices since the April peak, steel and aluminium production is now running below cost as China’s purchasing managers index falls, a report by HSBC Global Research says.

Steel producers are expected to cut production during the third quarter.

This is broadly welcome as it indicates a lessening of overheating fears in the Chinese economy. “This is merely a slowdown, not a meltdown,” HSBC says.

However, it does mean pressure on both the price and volume of imported commodities such as iron ore, because of falling demand and the ability of domestic ore and coal producers to recapture market share, which they lost to imports during 2009.

China is spending more than $US21 billion ($23.5 billion) expanding its own iron ore production, with a target output of 1.1 billion tonnes by 2015, or 25 per cent above 2009 levels.

In the short term, China also has the buffer of a 70 million tonne stockpile of iron ore at its ports, which is equal to about two months of inward shipments at recent volumes.

Iron-ore imports are expected to slow in coming months. But China’s steel production typically rebounds once prices have fallen below the cost of production, which means that there is less concern, HSBC says. However, China’s export metal industries are likely to be hit by the withdrawal of subsidies.

The end of the steel export tax rebate will increase the cost of Chinese export steel to comparable levels with its Asian competitors, and this could hurt China’s market share but increase demand for iron ore in Japan and South Korea.

The Chinese government has also withdrawn the subsidised power prices given to heavy industry, including aluminium, as it makes a serious start on meeting a target of reducing energy intensity in 2010 by 25 per cent over 2005 levels.

The aluminium industry will have to adjust to these new costs and HSBC expects it to achieve this through production cuts. Aluminium production has been running at high levels, but alumina imports have begun to slump.

Incidentally, the slowdown in Chinese mineral imports has sparked a fresh debate over the use of the Baltic index of bulk shipping rates as a proxy for commodity demand.

This has often been a dubious proposition because the commodity analysts who use it do not take into account the influence of fleet size and the supply of ships. With the surge of new tonnage ordered before the financial crisis now being delivered, the index is likely to become far less useful as an indicator of what cargoes are doing.

BRW

Comments (0)