Commodities | Jun 20 2006
By Rudi Filapek-Vandyck
Chinese steel output continues to surprise market watchers with steel analysts at Credit Suisse pointing out that the statistics for May, as published by industry service Mysteel.net this week, indicate production in China has reached an all-time record level of 35.9mt last month.
It has not changed the analysts’ view on the sector outlook, however. For starters, Credit Suisse still doesn’t believe that China is a long term steel exporter. Secondly, the analysts suspect the industry may have decided to accelerate exports in anticipation of further measurements by the central government to curb steel production.
All this bodes well for iron ore producers. Credit Suisse analysts cite a recent paper published by the China Metallurgical and Mining Association which stated growth in domestic iron ore production cannot meet the demand of increasing iron and steel production in China. The only logical implication of this is that the supply deficit is likely to continue to increase with the analysts adding this situation is unlikely to change in the short term.
To add to the bullish outlook, the analysts report industry players at a recent iron ore conference in Athens estimated crude steel production in China will grow beyond 500mt (estimates for this year are for 400mt-plus).
The direct consequence of the estimated growth rates for Chinese steel output between 7% to 9% per annum is that the seaborne trade in iron ore would reach new heights in excess of 900mt by 2010.
The biggest fear within the industry, Credit Suisse reports, is that these projections will be an underestimate of what the Chinese really require by then.
There is a lesson in here for equity investors as well, Credit Suisse analysts believe. As they have observed market fundamentals for both steel and iron ore producers have strengthened (and are expected to remain doing so) it is probably time to start revisiting both sectors.