Cautious optimism on Chinese steel, iron ore demand

The global economy outside China is expected to see slowing demand this year, following higher interest rates by central banks to control inflation. But China could provide the impetus to offset some of the impact, said participants last week at the Informa Iron Ore and Steel forecast conference in Perth, Western Australia.

China may surprise on the upside against its gross domestic product (GDP) growth target of 5pc for 2023. China's GDP grew at 3pc from a year earlier in 2022, the lowest in 50 years.

The country's reopening from Covid-19 restrictions since late 2022 will be more supportive of services-led consumption, rather than construction-led consumption, said banking firm HSBC chief economist Paul Bloxham. This implies the upside for iron ore and steel demand will be limited this year.

The 5pc GDP growth target itself was deemed conservative by some participants. Others said that it was a pragmatic one and gave the right signal to global markets without over promising growth in 2023, given prospects of a slowing global economy and China's exposure to them as a key exporter.

Steel demand in China was likely to be driven by firm infrastructure sector growth, with the property sector expected to perform better than last year but unlikely to see growth. The volume of housing start-ups in China, which is a key indicator for steel use in real estate, fell by 39.4pc from a year earlier in 2022, which was a third consecutive annual contraction.

Data for January-February 2023 showed a 9.4pc year-on-year drop, underlining an improvement over last year but sustained pressure on the sector despite measures to ease credit access.

The shipping rate of high-grade (65pc Fe) iron ore cargoes from Australian direct shipping ore (DSO) producer Mount Gibson's Koolan Island operations is scheduled to accelerate from the end of this month as crushing capacity expands. It expects to sell around 2.9mn t of high-grade iron ore from Koolan Island, said Mount Gibson chief executive Peter Kerr, adding that iron ore prices had recovered rapidly since falling below $80/dry metric tonne last year on expectations of a Chinese recovery.

The company anticipates its iron ore grades to average 65pc Fe and to ship at a rate of approximately 4mn wet metric tonne (wmt)/yr.

Mount Gibson expects to ship around 600,000wmt of high-grade iron ore in the January-March quarter and is targeting 1mn wmt in the April-June quarter.

High-grade iron ore demand in the long term was also underlined by expectations that direct reduction iron capacity in Europe was likely to expand to 40mn t over 2035-40 from under 1mn t currently, said UK-South African mining firm Anglo American's manager, market analysis and digital models (iron ore) Siddharth Aggarwal.

Capex risks

Undeveloped high-grade DSO and magnetite ore projects face significant capital expenditure (capex), among other risks, said commodity research firm CRU senior analyst Ian Warden.

Guinea's Simandou iron ore project in west Africa, which can potentially produce 120mn t of high-grade direct shipping ore, faces a $22bn capex that involves the development of infrastructure through difficult terrain. But the project is well placed to meet China's demand for developing strategic iron ore reserves overseas and will also respond to the changing global iron ore demand mix that is pivoting towards lower emissions.

The role of hydrogen in future steel production was acknowledged by Informa participants but costs and transportation remain obstacles.

"The hydrogen push is like turning the steel industry to the aluminium industry based on energy requirements to produce green hydrogen," said the managing director of consultancy AME Lloyd Hain, adding that while the technology for green steel production through hydrogen was in place, the energy requirements to power that technology were harder to meet.

By Deepali Sharma