China is set to jolt iron ore off a six-month low after approving an estimated $23 billion of steel projects that will use the raw material produced by mining companies such as Rio Tinto Group (RIO) and BHP Billiton (BHP) Ltd.
The commodity will climb to $152 a metric ton in the second half, according to the average of five analyst estimates compiled by Bloomberg. The price fell 0.3 percent to $130.6 today, near its year-low reached May 23, according to The Steel Index Ltd. Coking coal, another key ingredient in making steel, may gain 7 percent to about $220 a ton, analysts forecast.
“Commodity prices are already close to the bottom and are set to rebound,” Henry Liu, an analyst at Mirae Assets Securities Co., said by telephone from Seoul. “Prices will get a boost in the short term on speculation China will stimulate the economy. Real demand for steel depends on what incentives the government gives to drive investments.”
China approved new steel mills in the past two weeks as it tries to sustain economic growth after April industrial output rose the least since 2009. New plants of Baosteel Group Corp. and Wuhan Iron & Steel Group were among the 228 billion yuan of projects approved by China’s main planning agency, of which 65 percent are in the steel industry, worth the equivalent of $23 billion, Bank of America Merrill Lynch said in a May 30 report.
Top Revenue Generator
Iron ore generates the most revenue for both London-based Rio Tinto and BHP of Melbourne. China is the largest customer for both companies, providing 31 percent of sales to Rio and 28 percent to BHP in their most recent financial years, according to data compiled by Bloomberg.
Steel production in China, the world’s largest consumer of the alloy, may climb to more than 700 million tons this year, the China Iron and Steel Association said May 29. The nation produced 683 million tons last year.
Rio shares rose 2.2 percent to A$55.42 and BHP gained 1.5 percent to A$31.58 at the close in Sydney. Fortescue Metals Group Ltd. (FMG) rose 2.9 percent. The benchmark S&P/ASX 200 Index climbed 1.3 percent.
Long-term drivers of iron ore demand remain intact, BHP Chief Executive Officer Marius Kloppers said May 15, saying the world’s third-biggest shipper of the commodity expects China’s steel output to climb to 1.1 billion tons by 2025.
Rio Tinto, the second-biggest, is spending at least $15.6 billion to expand its iron ore operations to meet demand from China. BHP, Vale and Rio Tinto control about 67 percent of the total seaborne trade of iron ore, according to Bloomberg Industries.
Rio Tinto Profit
Rio Tinto’s profit may more than double to $13.2 billion this year and climb to $15.1 billion in 2013 from $5.83 billion last year, a Bloomberg survey of 18 analysts showed. Iron ore accounted for 78 percent of Rio Tinto’s profit in 2011.
BHP profit may fall to $18.5 billion in the year ended June 30 from $23.6 billion a year ago, a Bloomberg survey of 20 analysts showed. Iron ore accounted for 41 percent of BHP’s operating income in the year ended June 30, 2011.
Not every industry participant forecasts price increases. Iron ore will fall 19 percent before finding a “long term, sustainable” level as China’s economy slows, said the head of Fortescue Metals, Australia’s third-biggest producer. The price will drop to about $110 a metric ton, Fortescue Chief Executive Officer Neville Power said on June 3.
A manufacturing gauge on June 1 grew at the weakest pace since December, increasing the odds China will boost stimulus. China’s non-manufacturing industries expanded at the slowest pace in more than a year, as export orders declined and weakness in real estate countered strength in retailing and leasing, an official survey indicated on June 4.
Baosteel, Wuhan Iron
Baosteel Group, China’s third-biggest mill by output, and Wuhan Iron, the fourth-largest, won approval to build $21 billion of new plants five days after Premier Wen Jiabao said on May 20 he seeks to boost growth.
“Building a new steel factory is something we have to do,” the company said in an e-mailed response to Bloomberg queries. Baosteel would be unable to achieve growth only through domestic mergers and acquisitions, it said.
China’s top planning authority had delayed Baosteel and Wuhan’s mills in 2009, citing industry overcapacity. Baosteel’s project in Zhanjiang port, Guangdong province, will increase its production capacity by 2.3 percent to about 53 million tons. The Wuhan mill in Fangchenggang port, in China’s southwestern region, will add 8.5 million tons of annual capacity, or 22 percent. The largest steel plants are in the northern, eastern and western parts of the country.
“The Zhanjiang and Fangchenggang projects are the last pieces in the chessboard of China’s steel industry,” Luo Tiejun, head of raw materials at the Ministry of Industry and Information Technology, said at a conference in Shanghai on May 29. “The plants will not only supply steel to south China but also cover the markets of southeast Asia.”
China’s southern province of Guangdong, home to the Chinese units of Japanese carmakers including Honda Motor Co. (7267) and Toyota Motor Corp. (7203), needs more than 50 million tons of steel products a year, according to Xu Xiangchun, Beijing-based chief analyst with Mysteel Research Institute.
Flat steel products, used in cars and home appliances, make up almost half of the demand, he said.
“Iron ore and coal need a bit of a shove, so it’s certainly useful,” Peter Arden, a Melbourne-based senior research analyst at Ord Minnett Ltd., said by phone, referring to the stimulus measures. “Whatever they can do is helpful, the problem does seem to be quite large. If they don’t put some meaningful horsepower to it, it won’t turn around.”