Last week’s economic data dump shows that China’s huge economy is running in low gear and even as imports and exports continue at high levels. Domestic activity is starting to feel the weigh of weakening investment and the emerging distortions from the Trump tariff/trade war.
But despite that, there’s good news for the Australian economy and for major mining companies from the latest data which is being sweetened by the slide in the value of the Aussie dollar – all of which has seen a solid boost in our terms of trade since June.
One of the most important figures each month is China’s crude steel output which remains near all-time highs – 80.85 million tonnes a month in September – the third highest monthly figure ever.
In fact, Chinese steel production rose to hit near-record levels from May onwards – so much so that output for the first nine months of the year climbed 6.1% to a record 699.42 million tonnes.
That puts it on track to top 2017’s 831.7 million tonnes, which was up 5.7% from 2016.
This continuing strength in steel and iron ore demand and pricing must be confounding the experts (so-called) who have been forecast weakening demand for steel, iron ore and prices closer to $US50 a tonne that $US73, as it was on Friday.
It’s no wonder iron ore prices have risen more than 5.7% in the past month in China – production figures for September and the first nine months of this year confirm the industry is booming – a sharp contrast to the sluggish level of demand and activity from cars, construction and other sectors of the economy.
The standard 62% iron ore index price from the Metal Bulletin was $US73.28 on Friday against $US69.24 at the end of September (before the golden week holiday break).
The slowing level of demand, investment, especially in infrastructure (up 3.3% in September against a 4.2% rise in first nine months of the year) and yet steel and cement – two key products in Chinese infrastructure investment, are doing very nice – booming even and the steel surge is turning out to be very nice for Australia.
The output of construction-related heavy industries grew relatively strongly in September – with crude steel and cement increasing by 7.5% from the same month in 2017 and 5.0% from September 2017, respectively.
And yet demand for steel hasn’t been impacted (yet) by the recent fall in motor vehicle production in July, August, and September – down by 10.6% in September from the same month in 2017.
And the demand for iron ore remains robust:
Chinese imports of iron ore increased 4% to 93.47 million tonnes last month from 89.35 million tonnes in August, but were still sharply lower than the record 102.83 million tonnes a year ago, according to China’s General Administration of Customs.
For the first nine months this year, China bought a total of 803.34 million tonnes of iron ore, down 1.6% on the same period of 2017. Not that crude steel output is up 6.1% in the same period of time. That’s due to the impact of China’s boosting its imports of high-quality iron ore produced by BHP, Rio Tinto and Vale (61%-62% to 65% iron oxide content) and to a declining degree, Fortescue Metals (which is spending more than $A1.6 billion on a new mine in the Pilbara to produce 60% iron ore to try and boost its average selling price).
It is also why demand for high-quality coking coal produced by Australia from NSW (South32) and Queensland (BHP especially) has kept world prices above $US200 a tonne when most forecasts have it slipping towards $US120 to $USS150 a tonne by the end of this year.
As we saw in the quarterly production report for BHP last week (and Rio, even though output fell 5% because of a fatality in WA in the third quarter) these giants are doing well (as is their big Brazilian rival, Vale). That should continue into 2019.
BHP, Rio and Fortescue price and report their business in US dollars, so a sustained rise in the iron ore price will be quite lucrative. But their costs in the business are priced in Aussie dollars which are falling relative to the greenback. That means profit margins should widen very nicely if the iron ore price rise is sustained.
