China boom falters as steel softens

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

30 Sep 2008

THE head of China's leading steel company says the Chinese economy and steel industry are both "heading for a downward slide", as hopes fade that China can insulate Australia's resource-dependent economy from the widening global downturn. The comments by Baosteel chairman Xu Lejiang coincide with evidence that a contraction in Chinese building construction is seriously crimping demand for key Australian commodities, like iron ore. "The economy is heading for a downward slide, so the steel industry is certainly heading for a downward slide," Mr Xu told BusinessDay at a Baosteel conference in Shanghai.
China has recently emerged as the key engine of the global economy after seven years of uninterrupted, accelerating growth.
Australia has been a particular beneficiary because of the resource-intensive nature of China's urbanisation and industrialisation.
But this year's severe credit rationing by the Chinese Government, which has helped quell an inflation breakout, has coincided with the worsening global financial crisis to smash the confidence of Chinese real estate investors and the building plans of residential construction companies.
Residential construction accounts for about 20% of Chinese steel demand.
The research house Mysteel said the Chinese steel industry was in "recession", with prices for key steel products falling between 15% and 20% since July. The Tangshan spot market price for imported Indian iron ore has plunged below $US110 a tonne, down from $US195 in early July.
Yesterday, the falling Chinese demand had cut Australia-China bulk freight rates to as low as $US13 a tonne, from as much as $US50 midyear.
Reading the Chinese economy is even more complicated because the Government shut down a large proportion of industrial and mining activity across north China around the Olympics period.
But property sales have steadily declined since early this year and property developers are struggling to raise finance for new projects and complete existing ones.
Most seasoned analysts remain confident about China's long-term urbanisation and growth, but the next few months are likely to be bumpy, particularly for businesses linked to the Chinese building industry.
"Patience is necessary because October will deliver a steady drip of depressing data from China — but this does not dampen our expectations for continued healthy (8%-plus) economic growth next year," said Andy Rothman, an analyst with CSLA in Shanghai.
Baosteel's Mr Xu said he had no plans to cut production but warned that steel prices were still "plummeting".
"A very large number of small steel mills are cutting production," he said. "Next year the thing to watch is whether the small steel mill sector revives, because in China a lot of small blast furnaces sprang up very quickly," he said.
"So next year I'll be watching the health of the downstream market, if they don't want my steel plates, I won't (supply)."
For the first time in more than five years, Chinese buyers can now buy spot market Indian iron ore as cheaply as Australian iron ore on long-term contracts, including freight costs.
Some observers believe that contract iron ore prices will fall next year, for the first time in seven years. "We've always said that by the time we break the benchmark price-setting system, the boom will be over anyway," an Australian mining executive said.
BHP shares fell 4.5% yesterday to $34.24, Rio Tinto was down 5.4% to $95.50 and Fortescue fell 6.4% to $5.60.

Source: Watoday