Chinese iron ore demand may slow with price hikes

Chinese iron ore demand may slow with price hikes

Many analysts see China's steel consumption growing 6 to 10% in 2005; however, Australia China Trade Pty Ltd, the company that acted in the price negotiations between Baosteel and Rio Tinto, recently came out and said that China's overall growth could slow in 2005. Speaking this week at an iron and steel conference, Australia China Trade Pty Ltd's director, Juyan Feng, predicts that China's growth would taper off this year due to economic adjustments and market conditions. She says that the central government in Beijing is targeting gross domestic product (GDP) growth of 7 to 9% in 2005, a decrease from the 9.5% growth rate of 2004. However, some analysts counter that China will continue its robust growth in 2005. These analysts point to the fact that even though China finished 2004 with 9.5% GDP growth, the growth rate over the last three months of 2004 was closer to 13%. Feng suggests that her prediction for a slow down in China's growth will show itself most visibly in the country's drop-off in demand for iron ore. Although the iron ore production capacity of China increased in recent years, it is not enough to keep pace with the demand from new steel facilities. China therefore purchases around one-third of the world's production of iron ore. Feng explains that because China is reliant upon iron ore imports, growth in iron ore demand could fall to single digit levels when the huge price hikes, as much as 71.5%, set in after April 1, 2005. London shipbroker Simpson Spence & Young predicts a 15% increase in Chinese iron ore imports in 2005. AME Mineral Economics predicts a 20-25% rise to 250 million metric tons, up from 200-210 million metric tons in 2004. What effect the increased prices of raw materials will have on China's steel production and demand remain to be seen. As far as steel production is specifically concerned, Feng expects China to reach nearly 300 million metric tons of capacity in 2005, compared to the 270 metric tons capacity in 2004. Other analysts suggest that the addition of new, modern mills will allow China to approach 330-340 million metric tons of production capacity in 2005. However, Feng claims that the removal of old technology and production lines will offset the increase in production capacity brought about by China's new mills.