Pimco Warns on China Steel as Goldman Sees Output Declining

13 March 2015

Pacific Investment Management Co. sees little growth potential for steel demand in China as the housing market slows, hurting the outlook for the global industry and iron ore prices. Goldman Sachs Group Inc. said output will drop.

“The years of huge growth in China’s housing development market are over, spelling tough times over the long-term horizon for global steel-making,” Raja Mukherji, head of Asian credit research, and analyst Emily Au-Yeung wrote in an e-mailed report received on Friday. At best, steel demand in the country may expand in the low single digits this year, they wrote.
China grew at the weakest pace since 1990 last year and is set to slow further in 2015. Asia’s largest economy accounts for about half of global steel output and is the biggest buyer of seaborne iron ore, which fell to the lowest price since 2008 this week amid a global glut. Goldman Sachs forecast in a report on Friday that China’s steel production will contract this year, repeating its outlook, while UBS Group AG predicted earlier this week the first drop since the early 1980s.

“The outlook for China’s steel demand is not expected to improve this year,” said Andy Ji, an economist at Commonwealth Bank of Australia in Singapore. Given the persistent oversupply in housing, a strong recovery is unlikely, he said.

CISA’s View

Steel output in China will shrink this year as demand has peaked, China & Iron Steel Association Deputy Secretary-General Li Xinchuang said at a conference in Perth, Australia, on Wednesday, predicting a decline to 814 million metric tons from 823 million tons last year. Pimco’s analysts didn’t give production or demand forecasts in figures.

“We expect downside risks to steel demand to continue to materialize as past housing construction growth rates are unsustainable,” the analysts wrote in the report from the Newport Beach, California-based money manager. “While there are other end users of steel -- including machinery, autos and white goods -- they are unlikely to propel China’s steel demand.”

Among those expecting China’s steel production to keep on rising are the largest iron ore miners, including BHP Billiton Ltd. and Rio Tinto Group. Output will reach 1 billion to 1.1 billion tons by 2025, Jimmy Wilson, head of BHP’s iron ore business, said on Tuesday. Production will expand to 2030, Alan Smith, Rio’s Asia president for iron ore, said last month.

While China built enough housing from 2000 to 2014 to accommodate 42 percent of its population, that pace of expansion is unlikely to continue, according to Pimco, which also forecast slower growth in infrastructure spending. The sectors accounted for as much as 60 percent of steel demand in 2013, it said.

Iron Ore

Iron ore and metallurgical coal will continue to face headwinds, Mukherji and Au-Yeung wrote in the four-page report. Given the increase in worldwide iron ore supply, there’s pressure for the steel-making raw material to trade below $60 a dry ton, Pimco’s long-term floor price, they said.

Ore with 62 percent content at Qingdao fell to $57.61 a ton on Wednesday, according to Metal Bulletin Ltd. That’s the lowest since at least May 2008, when Metal Bulletin started compiling weekly prices. It’s 19 percent lower this year.

“We expect Chinese steel production to decline by 1 percent this year,” Goldman said in the 19-page commodity report on Friday, repeating a comment from Jan. 23 note that saw a drop this year before a rebound from 2016 to 2018. Mills and traders in China remain cautious, according to the bank, which forecasts iron ore will average $64 this year and $61 in 2016.

Peak steel arrives in China this year as production and consumption will decline after 2015 as the economy matures, according to Morgan Stanley. UBS said in a March 10 report that after a drop in crude-steel output this year, the outlook for supply was “flattish” through to 2018.