Iron Ore Miners Still Bullish on China Demand

For several years, China has had the world’s largest demand for iron ore, but now BHP Billiton, the world’s biggest miner, has reported that China’s demand for iron seems to be waning. China overtook Japan in demand for iron ore in 2009 and has since been Australia’s largest export market. The Australian Reports:

Senior executives from BHP Billiton, Rio Tinto and Fortescue Metals Group all said yesterday they believed the structural drivers behind China’s demand for iron ore remained intact and that its economy would not suffer a “hard landing”. BHP’s head of iron ore, Ian Ashby, told The Australian the mining giant’s $US10 billion ($9.5bn) expansion in the Pilbara was “full steam ahead”, despite recent speculation that chairman Jacques Nasser had told investors the company was re-evaluating its spending plans.

Mr Ashby said growth in demand for iron ore was “flattening” and he believed the global floor price for the commodity would settle at $US120 a tonne, compared with its current level of about $US140. Global seaborne iron ore demand would average 4.4 per cent until 2020, he said, whereas it had reached 8.4 per cent between 2000 and 2010.

Mr Ashby said BHP still expected Chinese steel production capacity to grow from about 700 million tonnes last year to as high as 1.1 billion tonnes by 2025.

He noted that the era of double-digit growth in Chinese steel production had come to an end, as spending on infrastructure and other major projects in the country came off the boil.

Despite the decrease in demand, mining companies are sticking to their expansion plans, and the supply for iron ore is finally catching up to the demand. Reuters adds:

Rio, BHP and other miners have been pursuing a strategy of running at full production and expanding capacity in long-life and relatively low-cost commodity assets compared to the selling price of ore, banking on squeezing out higher cost producers.

Analysts agreed even single-digit growth in Chinese ore demand should be enough to spur miners to push ahead with production expansion plans.

“Certainly the rate of growth in Chinese demand is slowing, but the growth is from an ever increasing base so the number of iron units required continues to rise,” said Paul Gray, analyst at Wood Mackenzie, who sees the seaborne iron ore market staying tight through 2012 and 2013.

“Although the rate of GDP growth in China is more immediately slowing, we remain confident, on the basis of the figures we have seen, of a soft landing, with solid growth for this year,” David Joyce, Rio Tinto’s managing director of expansion projects, said in a speech.

March 20, 2012 3:17 PM
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