China Iron Ore Demand Growth Rate Peaking - MS Metals Economist

SYDNEY, Mar 26, 2012 (Dow Jones) -- The rate of growth in China's iron ore demand has peaked but a strong investment case remains for the crucial steel making commodity, said Morgan Stanley's global metals chief economist on Tuesday.

"This is a story which we think still has legs," Peter Richardson told a conference in Sydney.

Even though the growth rate of iron ore demand from China has likely peaked, the sheer size of China's requirement means the market will remain imbalanced until 2014 at least, he said.

"Of course this is the law of large numbers," Richardson said. "A 3% year-on-year increase or 4% increase on a steel production base of 683 million tons still requires, we think, close to 40 million-50 million tons more iron ore this year alone than last year."

Shares in big mining companies including BHP Billiton Ltd. (BHP.AU) and Rio Tinto Ltd. (RIO.AU) have taken a hit since early last week following comments from key executives that China's demand for iron ore is flattening out. Concerns over China's market for the commodity also sent the Australian dollar sharply lower.

Richardson added that the deteriorating quality of iron ore mined in China is helping to sustain demand for imports, with today's average ore grade in China of about 17-18% much lower than 33% six years ago. Widening restrictions on Indian iron ore exports will mean Australian and Brazil will increasingly have to take up the slack, he said.

Releasing an update Tuesday to its outlook for global metals prices, Morgan Stanley reduced its 2012 iron ore price estimate by 3% to US$151 per metric ton, down from US$156. It left its forecasts for 2013 and 2014 unchanged at US$160 and US$140 a ton respectively. Prices are then expected to tail off to US$125 in 2015, falling to US$110 in 2016 and US$105 in 2017. It's long term price forecast is unchanged at US$99.