More steel bears

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:

120320_AJMConference

Comments

  1. After yesterday’s bombshell from Ian Ashby…<

    Bombshell? I guess this author didn't read slide 7

    "Seaborne iron ore expected to grow strongly"

    On the other hand I guess this projection might be a bombshell for permabears.

    • Yeah I saw slide 7. Forecast Chinese demand definitely flattening. I’m guessing BHP is betting on demand from India judging by slide 5.

      Three points:

      1. With BHP building all that new capacity they’re not exactly going to forecast a rapid slowdown in iron ore demand are they? That’s why admitting there was “flattening” demand is a bombshell.

      2. India is no China. They show no signs of embarking on a debt-fueled construction binge like the Chinese have over the past 10 years.

      3. The tired old urbanisation arguments get trotted out every time the miners need to justify their forecasts. If there was so much demand for urban housing, why are Chinese property prices falling and why are there so many empty apartments?

  2. It is funny to see that BHP and the Chinese politburo are far more pragmatic than the China boosters!

    Me thinks Ian Ashby, President of BHP iron ore, will now be labelled a collapsenik!

    • yeah, a guy that forecasts “Seaborne iron ore expected to grow strongly” is a collapsnik.

      One can only wonder at the sort of mind that could draw that conclusion.

      • Phew, you mean Ian Ashby was saved by a single sentence from being labelled a collapsenik?

        Note to self: To forestall a China booster attack, add some inane positive comment while talking about China.

        • I am just wondering what sort of mind would conclude that a guy forecasting growth, which Ashby is, could ever be considered a collapnsik.

          You’re the one that made the statement so how does a guy who believes in growth become a collapnsik? If you don’t like being called on it then explain how you arrived at your conclusion.

          • It’s not just about the number. It’s about the number relative to the expectations that are built into pricing, speculative positions, economic dependencies and economic structures.

            When the balance shifts at the margin, the whole meme can start to unwind.

          • Ben my specific question to Mav was what thought processes would lead someone to think that a guy (Ashby) who is forecasting growth could be labelled a collapsnik (i.e. forecasting collapse). I’m just trying to understand what goes on inside his head.

          • It is pretty simple, really. Anyone who has a realistic, even minutely bearish view on China/mining is instantly labelled a collapsenik by China boosters.

            So taking that definition and applying it with rigour, Wen Jiaboa and Ashby are collapseniks. Nice to know that I am in good company. Ciao.

          • Wen Jiaboa is supposedly going to organize 7.5% growth and Ashby says he is expecting to be shipping an increasing amount of ore to China.

            Claiming these guys hold remotely bearish views on China makes me wonder if you have suffered a head injury in your playground.

  3. Diogenes the CynicMEMBER

    What is interesting is how this ‘news’ is so surprising to the market. Imagine if they stopped a couple of project expansions because demand was actually softening (that is the next announcement).

    Now where are our paddles? Turn this boat around!

  4. I lived in China for years, one thing I noticed was the massive number of empty apartments, but what was also funny is how the Chinese government and local government want to keep a lid on the true number of empty apartments.

    So some Chinese students started going around reading apartment power meters which show if someone is really living there. The results were a shock as many places are empty.

    The other argument about more country people moving into apartments does not hold water as many in the countryside can bearly afford to buy food, look at stats at how much food takes from a country wage and you will find 10’s of millions of people have to spend something like %50 of their wage on food. So this mass migration is only for the few that can afford it, the 100’s of millions that work the land can’t, even with empty cheap apartments the prices will still be way out of their range.

    On top of this, China has a card system, every citizen has a ID card stating where they come from, most migrant workers don’t have access to local services when living in cities they don’t come from. So that with high priced apartments means that millions won’t be coming at all.

    China’s train crash knocked the hell out of confidence in their rail network, the shares of rail stock and supporting companies dropped and how much iron, cermet and steel does China’s railway companies use ? so if that is slowing down then what?

    I would not be surprised if the Chinese government is stocking up on resources to keep for a rainy day or put downward pressure on resources later on.

    Then, there is the locals buying such resources as investments, just buying up ton’s of what ever metal for future investment.

    I would not be surprised if China has this massive over supply and at any time can just spring those facts out into the media. I kind of backup weapon which could be used to crush resource prices. Imagine if they did that when resources were at an all time low, they could just say, oh, we have 600 million extra tons of steel we didn’t tell you about, thus forcing the price down even more and picking up steel at a bargain.

    One thing I learnt working at one of the big mining companies on a Chinese Joint Venture in IT Security and Risk, China classes mining, resources, mapping data etc… as state secrets so what ever you read in the media is most likely going to be wrong as its a criminal offensive in China to give out such details.

    Even if you read something that is a state secret in someone company and did not get authorization from the Chinese government you can be arrested and put in jail.

    So what ever news about stock levels, etc… and demand for the most part is a best guess.

    • bskerr2:

      Fascinating comment.

      When did you live in China?
      Are you back in Australia now?
      Has the average Chinese citizen lost faith in real estate as an investment?

  5. You collapseniks are all too focused on reading the tea leaves in one cup, instead of looking at the big picture. Try reading the Phat Dragon forecast H&H has just posted.

  6. MAV
    why do you so often have to group people and denigrate them when you disagree with them?
    reminds me of someone calling media he does not agree with the ‘hate’ media.

    lets discuss differences of opinion and argue points without name calling.