China is set to jolt iron ore off a six-month low after approving an estimated $23 billion of steel projects that will use the raw material produced by mining companies such as Rio Tinto Group (RIO) and BHP Billiton (BHP) Ltd
The commodity will climb to $152 a metric tonne in the second half, according to the average of five analyst estimates compiled by Bloomberg. The price declined to $131 a tonne yesterday, near year-lows reached on May 23, according to The Steel Index Ltd Coking coal, another key ingredient in making steel, may gain 7 percent to about $220 a tonne, analysts forecast.
“Commodity prices are already close to the bottom and are set to rebound,” Henry Liu, an analyst at Mirae Assets Securities Co., said by telephone from Seoul. “Prices will get a boost in the short term on speculation China will stimulate the economy. Real demand for steel depends on what incentives the government gives to drive investments.”
China approved new steel mills in the past two weeks as it tries to sustain economic growth after April industrial output rose the least since 2009. New plants of Baosteel Group Corp. and Wuhan Iron & Steel Group were among the 228 billion yuan of projects approved by China’s main planning agency, of which 65 percent are in the steel industry, worth the equivalent of $23 billion, Bank of America Merrill Lynch said in a May 30 report.
Iron ore generates the most revenue for both London-based Rio Tinto and BHP of Melbourne. China is the largest customer for both companies, providing 31 percent of sales to Rio and 28 percent to BHP in their most recent financial years, according to data compiled by Bloomberg.
Steel production in China, the world’s largest consumer of the alloy, may climb to more than 700 million tonnes this year, the China Iron and Steel Association said May 29. The nation produced 683 million tonnes last year.
Rio shares rose 2.3 percent to A$55.52 in Sydney at 1:59 p.m. local time. BHP rose 1.9 percent, Fortescue Metals Group Ltd (FMG) gained 3 percent and Atlas Iron Ltd (AGO), Australia’s fastest growing iron ore producer, was 1.9 percent higher. The benchmark S&P/ASX 200 Index was 1.5 percent stronger.
Long-term drivers of iron ore demand remain intact, BHP Chief Executive Officer Marius Kloppers said May 15, saying the world’s third-biggest shipper of the commodity expects China’s steel output to climb to 1.1 billion tonnes by 2025.
Rio Tinto, the second-biggest, is spending at least $15.6 billion to expand its iron ore operations to meet demand from China. BHP, Vale and Rio Tinto control about 67 percent of the total seaborne trade of iron ore, according to Bloomberg Industries.
Rio Tinto’s profit may more than double to $13.2 billion this year and climb to $15.1 billion in 2013 from $5.83 billion last year, a Bloomberg survey of 18 analysts showed. The shares may rise 69 percent to AU$89.31 in 12 months, 13 out of 16 analysts surveyed by Bloomberg said. Iron ore accounted for 78 percent of Rio Tinto’s profit in 2011.
BHP profit may fall to $18.5 billion in the year ended June 30 from $23.6 billion a year ago, a Bloomberg survey of 20 analysts showed. Its shares may gain 44 percent to AU$44.19 in 12 months, 13 out of 18 analysts surveyed by Bloomberg said. Iron ore accounted for 41 percent of BHP’s operating income in the year ended June 30, 2011.
A manufacturing gauge on June 1 grew at the weakest pace since December, increasing the odds China will boost stimulus. China’s non-manufacturing industries expanded at the slowest pace in more than a year, as export orders declined and weakness in real estate countered strength in retailing and leasing, an official survey indicated on June 4.
Baosteel Group, China’s third-biggest mill by output, and Wuhan Iron, the fourth-largest, won approval to build $21 billion of new plants five days after Premier Wen Jiabao said on May 20 he seeks to boost growth.
“Building a new steel factory is something we have to do,” the company said in an e-mailed response to Bloomberg queries. Baosteel would be unable to achieve growth only through domestic mergers and acquisitions, it said.
China’s top planning authority had delayed Baosteel and Wuhan’s mills in 2009, citing industry overcapacity. Baosteel’s project in Zhanjiang port, Guangdong province, will increase its production capacity by 2.3 percent to about 53 million tonnes. The Wuhan mill in Fangchenggang port, in China’s southwestern region, will add 8.5 million tonnes of annual capacity, or 22 percent. The largest steel plants are in the northern, eastern and western parts of the country.
“The Zhanjiang and Fangchenggang projects are the last pieces in the chessboard of China’s steel industry,” Luo Tiejun, head of raw materials at the Ministry of Industry and Information Technology, said at a conference in Shanghai on May 29. “The plants will not only supply steel to south China but also cover the markets of southeast Asia.”
China’s southern province of Guangdong, home to the Chinese units of Japanese carmakers including Honda Motor Co. (7267) and Toyota Motor Corp. (7203), needs more than 50 million tonnes of steel products a year, according to Xu Xiangchun, Beijing-based chief analyst with Mysteel Research Institute.
Flat steel products, used in cars and home appliances, make up almost half of the demand, he said.
“Iron ore and coal need a bit of a shove, so it’s certainly useful,” Peter Arden, a Melbourne-based senior research analyst at Ord Minnett Ltd, said by phone, referring to the stimulus measures. “Whatever they can do is helpful, the problem does seem to be quite large. If they don’t put some meaningful horsepower to it, it won’t turn around.”