China's growth continues to outpace
predictions. The country's economy grew a stunning 11.9 percent
in the second quarter, according to official figures, although
many analysts think the true growth rate could have been even
higher. Investment, currency reserves and now inflation also
are outstripping earlier estimates, with huge repercussions for
the global economy.
In the steel sector, the picture is slightly
more complex. Chinese crude steel output continues to grow at
an incredible pace and looks likely to rise by at least 60
million tonnes to more than 480 million tonnes this year. The
growth rate is slowing, however; steel production rose 13.6
percent year-on-year in August, down from 14.5-percent growth
in July and around 20 percent at the start of the year.
That trend looked set to level out beginning
in September as domestic demand entered its peak season, but
there are some reassuring signs for Western steelmakers that
the Chinese government's attempts to slow growth are bearing
some fruit, albeit slowly.
The evidence of the steel industry's
continuing expansion-and even the hints that output growth may
be coming under control-have caused many analysts to rethink
their predictions for the sustainability of the current growth
cycle. In particular, demand for steelmaking raw
materials-especially iron ore-looks set to surpass many
As recently as this spring, some analysts,
and even some iron ore producers, were speaking of 2008 as a
"turning point" in the world market. Under this model, the big
increases in investment in new mines that major producers and
juniors alike have made in recent years would finally tip the
supply-demand balance, sending prices lower or at the very
least putting an end to the big double-digit percentage
increases seen in recent years.
But that view has been losing a lot of
traction in recent months. Top analysts have been lining up to
increase their predictions for next year's benchmark iron ore
prices, which will take effect April 1 after negotiations
between suppliers and consumers.
UBS AG started the ball rolling by revising
its prediction of a 10-percent increase upwards to 25 percent
in July. JPMorgan Chase & Co. also is tipping a 25-percent
increase, again up from 10 percent, while Merrill Lynch &
Co. Inc. and Goldman Sachs JBWere Pty Ltd. both predicted a
Analysts have been wrong about prices before,
particularly ahead of the 71.5-percent year-on-year increase in
2005 that cemented the shift in the balance of power in favor
of the three bigger suppliers, Cia. Vale do Rio Doce (CVRD),
Rio Tinto Plc and BHP Billiton. However, the fact that most
analysts are moving in the same direction-toward a bigger rise
in prices-is significant.
There are many reasons why analysts have
changed their predictions, but they are all underpinned by the
sustained strength of Chinese demand. Even the Chinese
themselves appear to be accepting reality Steel company
executives are openly conceding that prices will have to rise
next year, a sharp reversal from the common practice in recent
years that saw the Chinese industry refuse to countenance any
chance of a price increase until the benchmark talks were all
but exhausted, even as the rest of the world was taking it for
granted that prices would have to rise.
The tightening freight market is a big reason
behind the predictions of a bigger price increase next year.
Freight rates for dry bulk commodities have surged thanks to
Chinese demand and congestion problems, in some cases tripling
since January. This helped push iron ore spot prices to record
highs in August and September. The spot market is dominated by
trade between India and China, with the large majority of other
seaborne trade tied up in long-term contracts.
Spot prices for iron ore fines reached $155
per tonne c.i.f. China in mid-September, up 50 percent in just
three months and double the price at the beginning of the year.
Even on an f.o.b. basis, prices are more than $100 per tonne,
putting the spot market significantly above last year's
benchmark levels and making it virtually impossible for Chinese
buyers to argue that prices should fall.
Suppliers are rushing to get new ore to
market, but even with the incentive of recent high prices, the
market remains tight. Some new projects planned by the largest
producers have progressed more slowly than expected, while
smaller miners-notably in Western Australia's ore-rich
desert-are not yet big enough to make much of a difference to
the market balance.
The longer-term picture is not so clear. Huge
amounts of new supply is due to hit the market within the next
five years as CVRD, Rio Tinto and BHP ramp up output and new
producers such as Fortescue Metals Group Ltd. move into the
production stage. Fortescue alone is planning to produce 55
million tonnes of high-quality ore per year from its operations
in Australia's Pilbara region. Concerns remain about whether it
will meet its production deadline of May 2008, although the
likelihood that prices will remain strong beyond that date is
good news for the company.
But it seems inevitable that iron ore prices
will fall in the years to come unless China, India or other
emerging economies pour another few hundred million tonnes of
crude steel into the world market. Failing that, the iron ore
boom will end-but not as soon as many people had expected.