Rio Sticks to Bullish China Steel Outlook After BHP Cuts

  • China crude-steel output seen at 1 billion tons by 2030
  • Differing forecasts present `condundrum' for investors

Rio Tinto Group maintained its optimistic outlook for steel production in China into the next decade, just a week after rival BHP Billiton Ltd. trimmed its forecast by as much as 15 percent.

After “rigorous analysis,” Rio, the world’s second-biggest miner, reaffirmed Chinese crude-steel output will reach about 1 billion metric tons by 2030. BHP now forecasts production to peak in the mid-2020s at between 935 million tons and 985 million tons, down from as much as 1.1 billion tons.

"I want to reaffirm my commitment and belief that the about a billion tons by 2030 is a damn good estimate," Andrew Harding, Rio’s chief executive of iron ore, said Thursday in an investor briefing. "It’s the best one out there."

The differing steel forecasts highlight comments last month by Glencore Plc’s Ivan Glasenberg that the largest mining companies have been wrong-footed on slower growth in China, with demand getting tricky to call. The nation has been the center of recent global market volatility amid signs its economy may be headed for a hard landing.

“This is an interesting conundrum for investors,” Ric Spooner, chief market analyst at CMC Markets in Sydney, said by phone. However, “the market generally doesn’t agree” with the assessment of the miners, taking a more pessimistic view of likely demand in China, he said.

Rio fell 0.6 percent to close at A$49.27 in Sydney. It has dropped 15 percent this year as concern over faltering China growth has sent iron prices tumbling 20 percent in 2015, eroding profits for the largest producers.

Peak Gone

China’s steel output fell 1.3 percent in the first half after peaking last year, according to the China Iron & Steel Association, which sees production declining to about 807 million tons this year. Slowing steel output in China will be among factors that’ll see demand for domestic and imported iron ore fall by about 60 million tons between 2018 to 2025, Citigroup Inc. said in May. Independent economist Andy Xie forecasts steel output may drop below 500 million tons in the next decade.

"Our Chinese steel production and demand forecast is continually reviewed and refined," Vivek Tulpule, Rio’s head of economics and markets, said at the briefing. "We’ve devoted significant resources to the question."

Rio’s iron ore and steel assessments are based on research on macroeconomic developments, industry costs, production trends and consumption drivers, according to Tulpule. China will continue to play an enormously important role, he said.

Steel Drivers

Rio cited residential and residential replacement, as well as automotive demand, driving steel output. A three-fold increase in obsolete Chinese scrap in the next 15 years will displace some iron ore requirements, the company said in an investor presentation.

About a quarter of China’s current urban residential building stock will be demolished by 2030, and newly built houses will be more steel-intensive than those they replace, Tulpule said. Passenger vehicles will rise by 280 million over the same period, a threefold increase, he estimates.

After decades of rapid growth spurred an unprecedented expansion in steel production, China’s now grappling with excess capacity as a property-led slowdown crimps demand. The country last year recorded the weakest annual expansion since 1990 and the economy will probably slow further in 2015.

Emerging markets will also play an increasingly significant role in the iron ore market, with non-Chinese steel demand expected to increase by 65 percent by 2030, London-based Rio said. India and Southeast Asian countries will be the largest regions for steel demand after China.

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