No end near for steel’s six-year roll

The Weekend Australian - Travel - - Resources - Derek Parker

THE world’s steel in­dus­try is on a roll, with no end in sight. The in­dus­try is in its sixth year of strong growth and the key driver is China. In fact, ac­cord­ing to the OECD Steel Com­mit­tee, China is likely to ac­count for more than one-third of all the steel con­sumed in the world in 2007. There might be a slight slow­down in the rate of growth in the coun­try’s steel use in 2008 (to about 10 per cent, down from about 13 per cent in 2007), in line with China’s likely over­all growth rate, but it is an adjustment rather than a cri­sis.

China’s own pro­duc­tion of steel has con­tin­ued to ex­pand to the point that Baos­teel, the coun­try’s largest iron and steel con­glom­er­ate, agreed to a price in­crease from Aus­tralian min­ers of 9.5 per cent in con­tract iron ore prices for the 2007 fi­nan­cial year.

Fore­casts by the Chi­nese Iron and Steel As­so­ci­a­tion sug­gest that steel pro­duc­tion in China is likely to in­crease by about 13 per cent in 2007/08, which sug­gests that the global mar­ket for iron ore will re­main strong for the rest of this year and into the next.

Ger­ard Burg, Min­er­als and En­ergy Econ­o­mist with the Na­tional Aus­tralia Bank, says ear­lier this year it was look­ing as if the iron ore mar­ket would slip back into sur­plus in late 2007, point­ing to weaker con­tract prices. ‘‘ But now that seems less likely. A key fac­tor is that the large num­ber of min­ing projects un­der de­vel­op­ment has meant a short­age of skilled peo­ple and heavy equip­ment, so there have been de­lays and cost over­runs.

‘‘ On the other side of the ledger, China’s de­mand, es­pe­cially for the high-qual­ity steel needed for in­fra­struc­ture projects, re­mains stronger than an­tic­i­pated. The gen­eral view is that global prices for iron ore and cok­ing coal are likely to re­main strong un­til well into 2008, at least.’’

There is ev­i­dence that the Chi­nese Gov­ern­ment is seek­ing to rein in growth in the coun­try’s steel­mak­ing sec­tor. The Gov­ern­ment re­cently an­nounced poli­cies to close about 35 mil­lion tonnes of pro­duc­tion ca­pac­ity, as well as a num­ber of out­dated plants, but so far lit­tle has hap­pened.

A para­dox is that China has, in the past few years, also emerged as a steel ex­porter, but only of low qual­ity steel. ‘‘ Much of the growth in China’s steel pro­duc­ing in­dus­try has been dis­or­gan­ised,’’ Burg says. ‘‘ There are a lot of plants that are not cost-ef­fec­tive, and very pol­lut­ing. The cen­tral gov­ern­ment is try­ing to bring some sort of or­der to the in­dus­try, but its di­rec­tives are not al­ways car­ried out at the lo­cal level. Bei­jing has said that it does not re­ally want the coun­try to be a big steel ex­porter, but the pat­tern has been that if pro­vin­cial gov­ern­ments can see the op­por­tu­nity to make some money through ex­ports they will do so.’’

De­spite the im­por­tance of China in the global steel out­look, it is not the only game in town. In 2008 the US is likely to add to global steel de­mand, af­ter sev­eral years of work­ing down stocks, es­pe­cially in its au­to­mo­tive in­dus­tries. But the key coun­tries to watch are those on de­vel­op­ment paths.

In­dia, with enor­mous po­ten­tial for steel con­sump­tion, has al­ready be­gun to af­fect the world mar­ket. There is large-scale in­vest­ment in the coun­try’s in­fra­struc­ture, such as rail­ways, ports, and roads, as well as private sec­tor con­struc­tion. De­mand for steel in Brazil is also look­ing good, mainly due to the au­to­mo­tive and con­struc­tion sec­tors. In­dia and Brazil are both be­gin­ning to di­vert their iron ore pro­duc­tion into do­mes­tic pro­duc­tion and away from ex­ports, which is likely to keep global prices strong.

By the end of the decade, Rus­sia will prob­a­bly also be a ma­jor steel con­sumer, as its econ­omy con­tin­ues to grow and much of its age­ing in­fra­struc­ture is re­fur­bished. The coun­try is also grad­u­ally mod­ernising its own steel­mak­ing ca­pac­ity, re­plac­ing out­dated open­hearth plants with elec­tric-arc fur­nace.

An­other re­gion with po­ten­tial is the Mid­dle East, which has vir­tu­ally no iron ore of its own and where steel con­sump­tion is be­ing driven by mas­sive in­fra­struc­ture and build­ing ac­tiv­ity. The re­gion has no cok­ing coal — com­pa­nies are ex­plor­ing the use of nat­u­ral gas in steel­mak­ing but the idea is em­bry­onic — good news for Aus­tralian ex­porters.

‘‘ Over­all, it’s a pretty healthy pic­ture, both for the im­me­di­ate out­look and for the longer term,’’ says Burg. ‘‘ It’s clear that China is cur­rently the key player, but the long term eco­nomic growth po­ten­tial of China and In­dia, among oth­ers, will sup­port de­mand for steel, and that means de­mand for Aus­tralian iron ore and coal. Steel, af­ter all, is a nec­es­sary build­ing block for a de­vel­op­ing econ­omy.’’

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