After yesterday’s bombshell from Ian Ashby, President of BHP iron ore, Citi published a report on steel which said that steel-making raw materials are “capped on the upside” because the Chinese porperty sector continues to normalise. Global crude steel production, they believe, will only grow half the rate of 2011 for this year:
We think steel-making raw materials are capped on the upside in 1H12. Demand is strong in selected pockets like US automotive, which is driving up steel production, but at a global level we expect crude steel production to grow at 3.6% yoy in 2012, half the rate of 2011. A key factor in this forecast is the continuing normalization of the Chinese property sector and shift towards consumption-driven growth. In addition, we would point out that the relatively strong steel consumption numbers in the US and parts of Europe have also been driven by a mild winter, which may have pulled demand forward.
For iron ore:
1) We think some iron ore restocking is taking place in China as Australian exports are picking up post cyclone disruptions.
2) We will see a pick up in steel production from March but the annual 2012 number still carries the potential to disappoint us on the downside.
3) If CISA is wrong (not our view) and NBS is right, then we will not get the sharp acceleration in production and hence iron ore consumption, which many market watchers were expecting when the initial data came out.
They also point out a few interesting facts:
Construction is still the dominant source of demand for steel in China – accounting for ~ 53% of steel demand. Since early 2011, monetary tightening and measures to curb property speculation had been put in place, putting the brakes on a decade long boom in commercial and residential property.
To end with an oblique note, the chart below shows the year-on-year growth of steel production in China, plotted along side with the year-on-year change in AUDUSD exchange rate. As you can see, the correlation became pretty tight over the last 5 years: