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China infrastructure spending expected to help steel recovery in 2013

Keywords: Tags  steel, iron ore, Chen Kexin, China Ministry of Commerce, infrastructure, Rio Tinto Plc, Fortescue Metals Group Ltd, Vale SA

SHANGHAI — China’s steel sector will recover solidly this year, helped by stronger government infrastructure spending, despite recent setbacks, one analyst said.

The recovery will come on the back of firm downstream demand, rising output costs and looser monetary policy as long as there is no significant downturn in the American and European economies, according to Chen Kexin, chief analyst at the Distribution Productivity Promotion Centre of China Commerce, a research institute linked to the country’s Ministry of Commerce.

"The U.S. Federal Reserve will not end its quantitative easing program unless the risk of an American recession is removed and U.S. job data improves. This will continue to give support to commodity prices, including those of iron ore and steel products," Chen said, noting that spot prices for 62-percent iron ore fines are expected to average more than $130 per tonne c.f.r. China this year.

China’s demand for crude steel is likely to reach 730 million to 850 million tonnes in 2013 vs. about 730 million tonnes last year, he said on the sidelines of the China Iron Ore Conference in Beijing sponsored by AMM sister publication Metal Bulletin, and could peak at between 900 million and 1 billion tonnes in the next three to five years, driven by new investments in real estate and infrastructure, such as railway and metro lines.

Chen didn’t rule out the possibility of Chinese mills eventually establishing steelmaking capacity overseas to cost cuts, but noted that total seaborne demand for iron ore would remain high before China’s demand peak.

Steel prices will be well supported by rising output costs, including higher raw material prices as well as rising energy, labor and logistics costs. Among them, environmental costs stand out.

Following the government’s enforcement of fresh pollution standards last October, China’s Ministry of Environmental Protection said it would impose revised emissions rules for new steel mills as early as March 1. The latest action reportedly was prompted by a significant bout of pollution in January, particularly in Beijing, which raised the profile of China’s environmental problems.

Chen also said that "the unexpected slump last year has led to excessive destocking of iron ore, so I am expecting an increase in restocking demand this year, which could consume a part of the expected increase in seaborne iron ore supply this year."

Major iron ore expansions in 2013 include a 53-million-tonne-per-year project by Rio Tinto Plc and a 60-million-tonne-per-year upgrade by Fortescue Metals Group Ltd. in Western Australia. Brazil’s Vale SA also plans to boost its Carajas output this year by 40 million tonnes annually.

A version of this article was first published by AMM sister publication Steel First.

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