China And Steel Impact On Australia Mining Sector #87

June 11, 2019 | Dawes Points |

Key Points

  • China steel output makes new record levels of 1034bntpa
  • China economic data still robust
  • Iron ore prices to rise further
  • Coking coal prices heading higher
  • India to increase iron ore imports
  • MENA DRI operations requiring magnetite are soaring
  • ASX iron ore producers printing money`
  • BHP ,RIO and FMG heading much higher
  • @DawesPoints Global BoomTM on track

Call me to participate:
bdawes@mpsecurities.com.au
+61 2 9222 9111


The achievement of over 1,000mtpa in crude steel production in China in April 2019 is truly remarkable and may be even higher in Dec Half 2019. This is not a sign of a declining economy in China.

China is by far the world’s largest consumer of raw materials and steel is the most important non-energy commodity for China.  It consumes almost 50% of global steel.

Steel is so important across the economy so that whatever happens for steel consumption will just as surely be repeated in aluminium and copper as well as many other commodities where China consumes even more than 50%.

Steel itself is universal and gives a clear indication of activity in every sector within an economy.

The monthly World Steel Association crude steel production figures are one of the best near-real time indicators of economic activity.  These World Steel Association figures show the underlying strength of the economy in China and also show the economic strength of other parts of the world.

Obviously the current US-China Trade War will have some impact if it is not soon resolved but because China faces west and not east it is far more concerned with its own economy and those of Asia, Africa and Europe.

But with steel the figures are current and some of these numbers from other parts of the world might surprise you as will be shown a bit later.

The economy in China has continued to grow such that it is currently around US$14tn and 90tn Yuan RMB and despite all the perpetual bearish talk the economy has continued to expand.

The key point is that whilst the growth rate itself is slowing the China economy is adding around US$1tn each year.

Note this idiosyncratic table that shows GDP in US$ falling with a weaker Yuan.   


The US$ has been firm so the Yuan RMB has weakened against these other currencies over the past five years.


The key drivers in China are of course a liberalisation of the Communist State that has allowed rapid expansion of commerce of all kinds and also the urbanisation such that since 2000 over 350m people have been added to city life and now cities now make up 60% of the population.

China has a population of around 1420m growing at 5mpa with a demographic problem arising from the One Child policy that is likely to see a population decline from around 2032 as China’s aged cohort peaks.


Another key factor is the remarkable growth in Personal Disposable Incomthat continues to exceed GDP growth reflecting the entry of about 20m people each year into paid workforce rather than on subsistence farming in many parts of China. These people experience a sharp boost in their own incomes and so it affects the averages.  The self employed and the entrepreneurs are also adding to this growth rate.

This is particularly important factor as the Middle Classes in China as they move to housing, cars, appliances and better food. The appetite is voracious and inexorable at present.


The savings rate is still very high at >40% and vast hoards of cash are still reported to exist.

It is also noteworthy that wealthy Chinese (and most SE Asian) businesses have just two asset classes for investment – the business (including property) and cash.

Consequently the economic expansion drive remains strong.

Anecdotally, the driving forces of property (location, location, location) together with the dramatic urbanisation has produced very large rises in true property value and rental incomes that can readily support the high property debt load.

And I see no sign of any significant slowdown that could turn to a downturn although the momentum has clearly slowed. Nevertheless, overall investment in construction is still rising.


Source: China Steel Industry Network

With this level of construction it is to be expected that demand for steel will be firm.

It is notable that demand for steel reinforcing bar is at robust new highs.


Source: China Steel Industry Network

The MPS steel rate of change indicator is providing another turning point.  The 12 month moving average is ~5% higher than a year ago and the six month rate of change is turning up again.

Crude steel output should be even higher in the Dec Half.

It has been clear that domestic iron ore production in China has seen a dramatic decline of around 50% from highs in 2014 as the iron ore price fell.  Almost all iron ore production in China is magnetite ore and requires crushing and grinding beneficiation to produce the saleable 65-70% magnetite concentrate so it is a high cost source of iron units and mines closed accordingly.  Ore grades had been declining over the past 5-8 years down to around 15% but with closure of some very low grade mines the average has begun to rise again.


Source: China Steel Industry Network

With rise in crude steel production and the decline in local iron ore production the level of imports rose strongly and Australia is the most important supplier.

Source: China Steel Industry Network

Port stockpiles in China had risen in 2017/18but began to turn down so with the loss of around 40mtpa of Brazillian output the market saw over 20mt cut from stockpiles in just two months.  Clearly this was more strong demand than declining Brazillian supply when viewed against the massive 1034mtpa monthly crude steel production in April.

No wonder the iron ore price has been rising.

But as indicated above, it is not just China.

India has become the second largest producer of crude steel with output now around 110mtpa with and has passed Japan.


Importantly, India has produced this steel from its own mines.  Also India uses magnetite concentrates for use in the production of Direct Reduced Iron (DRI) and Hot Briquetted Iron (HBI) for about 30% of its crude steel production in processes that are using gas as the reductant rather than the blast furnace route with coking coal. 



The demand however is outstripping existing mines and bureaucracy issues over mining titles is likely to limit near term expansion.  India is now an importer.

India would like to be producing 300mtpa of crude steel by 2030 so the jump from 110mt will be 190m crude steel requiring about 300mtpa of iron ore.  Probably 60% of this will need to be imported.

Where will it come from?

So with India needing more iron ore and Sth Korea still growing and Vietnam accelerating rapidly from a small start to a current 18mtpa the market for iron ore must remain tight.

And in addition to Vietnam we have other strong growth in MENA where again most production is as magnetite concentrate fed DRI products that use very low cost local gas and these are fed into electric arc furnaces (EAFs) that use low cost electricity from low cost gas for steel making.

Source: World Steel Association

So it becomes no small wonder that the iron ore price is strong.

It is clearly a demand issue not supply driven.

The iron ore price completed a text book A-B-C correction with that 5 wave C completing a Wave 2 into the 2016 low and this enabled Dawes Points to then call for new highs to come in iron ore prices.  That outlook is still on track. 

Iron ore prices are heading up and so are those for coking coal.


Source: China Steel Industry Network

So let’s now look at the Shanghai stock indices to see how the market views China.

Looks robust to me holding that 27 year uptrend and the recent 30% jump into 2019.

And I do like this relative performance chart vs the S&P500.

And while we are at it lets look at India’s Nifty 50 Index.

And also the Nifty against S&P 500:-

Capital is flowing to these `emerging markets’.

So the ASX Metals and Mining Index looks robust.

As do BHP

RIO,

 and FMG

The chart formations for these companies suggest VERY MUCH higher prices are coming for these stocks.

The Dawes Points Global Boom is firmly on track.

Don’t delay.

Call me to participate.

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