There is a very real chance that China’s crude steel production – one of the vital indicators that Australian economists, governments and investors, not to mention iron ore producers need to watch closely – could stall and fall this year.
That was after the annual data release yesterday in Beijing showed crude steel production slowing to its weakest growth rate on record in 2014.
Output rose just 0.9% last year, from 2013 to 822.7 million tonnes. That was sharply down from 7.5% growth rate in 2013.
At one stage earlier in the year annual steel production was set to reach 840 million tonnes, based on production levels at the time, but the slowdown from mid year clipped production growth.
Production in December rose for the first time in four months to 68.09 million tonnes and was up around 9% from December 2013 as well. But it wasn’t enough to put any gloss on the full year figure.
2015’s pace was far below that of China’s broader economic growth, which last year slipped to 7.4%, the weakest in 24 years, and an annual 7.3% rate in the last six months of the year.
The slowdown in steel output was widely expected among officials and analysts, as the central government attempted to consolidate industry overcapacity and force older mills to produce more value-added, less polluting products.
At the same time the government is trying to push the economy from a strong bias towards heavy investment, to one where consumption is a major driver of growth and consumers are encouraged to spend more freely.
But this is also being held back by the sluggish housing sector where too many homes are driving prices lower (upsetting existing and recent buyers and owners), or causing potential buyers to hold off as they watch prices fall.
And the slowdown in the new housing and development sectors is also have a major impact on steel demand (the overall property sector accounts for nearly a quarter of the entire Chinese economy).
And there’s new problems for the steel industry with demand from ship building slowing as companies cancel tankers and bulk carriers, as well as oil drilling rigs and other marine equipment.
"The direct reason is due to slower demand from fixed asset investment and real-estate investment," Xu Lejiang, president of the state-backed China Iron and Steel Association, said. "As our country’s economy enters a new normal, it’s bringing enormous pressures to the steel industry."
Another good indicator of the weak level of demand for steel was the surge in exports – they accounted for 8.3% of total production in 2014, up from 5.8% the year before.
Steel exports last year were a record 93.78 million tonnes in 2014 as steel makers sold surplus stocks.
But that is now forecast to slow after the central government cancelled tax rebates for alloys containing the element boron, which accounted for about 30% of exports. Excess stocks of that steel type have now been cleared, but that also means steel makers will have close to 30 million tonnes of extra steel available for the domestic market, or they will trim 2015 production by that amount.
Offsetting that was the news that the central government accelerated around 300 infrastructure projects earlier this month. These have a nominal value of close to $US.1 trillion, or nearly doubled the fabled $US586 billion spending spree announced in late 2008 as the economy tanked. The spending started last year (many were announced then) and will continue into 2016. Much of the money involved is already in the budget,and other spending plans and is not ’new’ spending.
Another important indicator of the slowdown in industrial production showed a sharp slowdown last year. Power output rose 3.2% to 5.46 trillion kilowatt-hours, less than half of the 7.6% rate of 2013 and the slowest in more than a decade.
The 2015 rate was well short of the 7.4% growth rate(the 2013 figure was back on target) and well under the 8.3% rise in industrial production over the full year.
However, crude oil refinery throughput, the measure of China’s oil processing, rose 5.3% last year compared with 3.3% in 2013, thanks to falling crude import prices which boosted imports and crude processing runs in the last quarter of the year.
So what does the slowing in steel output mean for Australian iron ore exporters?
As we saw yesterday Rio Tinto is determined to keep lifting production, and that will be the message from BHP Billiton in its half year report later today.
Rio now expects to dig 330 million tonnes of iron ore from the Australian operations it controls in 2015. And it aims a further increase in production of iron-ore in the Pilbara to at least 350 million tons by 2017.
China lifted iron ore imports 13.8% in 2014 to 932.5 million tonnes, with a near record 86.85 million metric tonnes or ore imported in December alone. Imports this month will also be high to take advantage of weak prices ahead of the lengthy New Year/Spring festival holidays next month, which will see iron ore demand slide (and continue into March).
Those surging imports from BHP, Rio, Vale and others displaced more expensive and lower-quality ore from domestic mines, but the question is whether this can continue this year as local governments face pressures from employment and revenues.
