China Reaching Peak Steel Doesn’t Mean Demand to Fall Off Cliff

Just because China is reaching peak steel demand doesn’t mean its consumption is about to fall of a cliff, according to the main lobby for the industry.

“We are at the beginning of a very long and flat peak,” World Steel Association Director-General Edwin Basson told reporters on Monday. “By the mid-2020s, we start seeing the beginning of a decline.” Consumption in the country may even temporarily rebound from 2017, he said.

China’s economy grew at the weakest pace since 1990 last year and is set to slow further. Still, its steel demand will slide just 0.5 percent in 2015 and 2016, the association said.

That’s less than some may have feared as the nation, which makes up about half of world steel output, already produces about 100 million metric tons a year more than it needs. Output will contract about 1 percent to an estimated 814 million tons in 2015, the China & Iron Steel Association says.

Goldman Sachs Group Inc. said last week that Chinese steel production may contract 9 percent from 2014 to 2019 with further declines in the 2020s. Morgan Stanley forecast the nation’s output and use of the alloy will drop after peaking this year.

Slower growth has meant weaker prices for iron ore, a key steelmaking ingredient, with prices down 56 percent in the past year. China is the world’s biggest buyer of seaborne iron ore.

The biggest iron-ore suppliers including Rio Tinto Group, Vale SA and BHP Billiton Ltd. have also raised low-cost output, adding to the glut and pushing prices into a bear market.

Ore Prices

“We do not see a rapid increase in iron-ore costs,” Basson told reporters. “At the moment, on the balance of evidence, I think they have more capacity than we require.”

Rio Chief Executive Officer Sam Walsh said Thursday that the company wouldn’t flinch from producing more low-cost ore.

“I know there’s a lot of controversy,” Walsh said. “I know that there’s a lot of late entries into the market who have taken advantage of higher prices and they are now feeling the impact of that as prices have come down. This is rational, normal economics.”

Even with the possible rebound in Chinese demand toward the decade’s end, that wouldn’t be enough to soak up new supply from iron ore mines from Australia to Brazil, Basson said.

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