Sydney - Before BHP Billiton cut its forecast for China’s peak steel output this week, CEO Andrew Mackenzie said he had his people go out to count air conditioning units, calculate the depths of basements and work out the amount of steel in each building.
Citing the acceleration of China’s transition to a consumer-driven economy, BHP trimmed its forecast by as much as 15 percent after a regular six-month review of its data, including surveys in cities from Xi’an to Guangzhou. BHP and rival iron ore producers will probably need to make further cuts to forecasts on Chinese steel output, according to Platypus Asset Management and CMC Markets Asia.
“Potentially the growth outlook for China is worse than people are thinking at the moment,” said Don Williams, Sydney-based chief investment officer at Platypus, which oversees about A$1.6 billion ($1.1 billion). Platypus began exiting holdings in BHP and Rio Tinto Group in 2012, judging the outlook for iron ore producers was weakening, he said.
Miners have been slow to recognise and respond to China’s weaker growth, reflected in both their forecasts and in the continued expansions of iron ore output, according to Williams. China is the world’s biggest steelmaker.
The largest mining companies have been wrong-footed on slower growth in China, Glencore Plc CEO Ivan Glasenberg said last week, with demand getting tricky to call. Concern over the faltering growth has sent iron prices tumbling 24 percent this year, eroding profits for the largest producers, including BHP and Rio. Ore with 62 percent content rose 0.5 percent to $53.93 a dry metric ton on Thursday, according to Metal Bulletin.
Next decade
BHP, which supplies coking coal as well as iron ore to China’s steel mills, now forecasts Chinese steel output will probably peak in the mid 2020s at between 935 million tons and 985 million tons.
It had said as recently as May that production would reach as much as 1.1 billion tons by the middle of the next decade. Responding on an earnings call this week to the prospect of making further cuts, Mackenzie was confident about the revision, saying the company had taken a realistic view after “bottom-up” analysis in “incredible detail.”
Rio, the second-largest miner, recently also revisited its forecast that China will produce 1 billion tons by 2030 and is sticking by the figure, CEO Sam Walsh said Aug. 6. "Let me assure you, it’s gone through robust review." The forecast remains current, Rio Tinto confirmed Wednesday.
“The miners remain well north of many of the other forecasts on China’s steel output," Ric Spooner, Sydney-based chief market analyst at CMC Markets Asia, said by phone. “Investors will need to have their own view on what the right pathway is.”
Trust numbers
Both BHP and Rio forecast the world’s Number 2 economy will meet its growth goal of 7 percent this year. “Our data today would say that they are pretty much growing at 7 percent, and therefore you can trust their numbers,“ Mackenzie said Tuesday in a Bloomberg Television interview with Erik Schatzker on ‘Market Makers.’
“We have been in China for a long time, we have a lot of data that we build from the bottom up to see what is actually really happening,” he said.
Further cuts to steel forecasts aren’t inevitable and even if the biggest miners are wrong in their estimates, weaker demand will impact higher cost iron ore producers more than BHP or Rio, Chris Drew, a Sydney-based analyst with RBC Capital Markets, said by phone. “Even if they turn out to have been a little optimistic, ultimately they are doing the right thing - not putting in any significant extra capital.”
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 said in May. Independent economist Andy Xie forecasts steel output may drop below 500 million tons in the next decade.
‘So weak’
“It’s difficult to see steel output rising further in the long term as demand has been so weak,” Wu Zhili, a steel analyst at Shenhua Futures in Shenzhen, said by phone on Wednesday. “Mining companies will probably influence each other in terms of their outlook.”
While it’s conceivable China could reach steel output of 1.1 billion tons, miners were slow to respond to China’s booming demand for iron ore from 2003, and may also be misjudging its slowdown, according to Philip Kirchlechner, director of Iron Ore Research Pty and a former head of marketing at Fortescue Metals Group.
“They reacted after China started taking off,” Kirchlechner said by phone from Perth, Australia, “Again, it’s a reaction and if they were wrong then, why are they right today?”
BLOOMBERG