Abstract Reuters reported on the evening of 14th, Beijing time, BHP Billiton revised its estimate of China's "peak steel output" last month. China's steel production ranks first in the world. BHP Billiton said that China's steel output will reach its peak around 2025, with a peak of 9...
Reuters reported on the evening of 14th Beijing time, BHP Billiton revised its estimate of China's "peak steel output" last month. China's steel production ranks first in the world. BHP Billiton said that China's steel output will peak around 2025, peaking between 9.35 and 985 million tons, with a midpoint of 960 million tons. However, Rio Tinto insists that China's steel output will peak at around 1 billion tons around 2030. BHP Billiton's position shift has attracted the attention of many media. After all, this is the world's two largest iron ore producers, and China is the world's largest buyer of iron ore. For BHP Billiton, Rio Tinto and its shareholders, China’s “steel production peak†is not just an academic hot issue. The time to reach the peak production and the level of production achieved will determine whether the two companies are improving their new iron ore production capacity. But the actual significance of the top-up estimate is not that the two miners’ estimates have a relatively small difference of 40 million tons, but rather that they still have a consensus on this issue. The two still hold a moderate view of China's industrial economy and believe that China's current economic slowdown is only a minor episode in the longer trend.
At present, almost every industrial commodity is shrouded in pessimism, and this view is in sharp contrast. The prices of several industrial commodities have now fallen back to levels during the global financial crisis. If their views are correct, then the current negative view on China is overdone. In the process of transition from an investment-led to a consumption-led “new normalâ€, there will inevitably be some troubles, but the market misinterprets it. this point. But if the market is right, Rio Tinto and BHP Billiton will be more criticized for their “infiltration and control†strategy for iron ore supply.
Will China's steel output growth continue for a longer period of time?
China's steel output has not increased at all. The cumulative production from January to July 2015 was 476 million tons, down 1.8% year-on-year. This is the first time that China's steel output has actually fallen for more than a decade. In January of this year, Zhang Guangning, president of the China Iron and Steel Association, warned that "China's steel industry has entered a peak platform period." Rio Tinto, more specifically, Rio's chief economist Vivek Tulpule responded "When looking at long-term trends," "It is important to set aside short-term fluctuations and cycles."
Tulpule made this statement in a speech to investors in Sydney earlier this month. He also said to the company at that event: China's steel production is still a long distance from the peak and made details. Explain and defend. His preaching can be found on the Rio Tinto website, where he can gain insight into the group's forecasting methods and its content is full of interesting pieces. For example, it is predicted that by 2030, nearly 25% of existing homes in Chinese cities and towns will be demolished and rebuilt, and buildings such as bungalows or two-story buildings will be replaced by higher buildings, which require more steel.
However, the key point is that China's steel production will continue to grow until 2030, although the average annual growth rate is only 1%, which cannot be compared with the 14% annual increase in the past 15 years. In other words, although economic growth has slowed down and it has slowed down sharply, it has not actually shrunk. Of course, it cannot be said that the theme of China's economic growth is over. BHP Billiton basically agrees with this, but only thinks that China's steel production will remain so strong for a long time.
The company did not disclose its research methods as much as Rio Tinto, but CEO Andrew Mackenzie told analysts at the company's interim earnings report, "We will estimate our estimates from scratch every six months. The tail is heavy, and the level of detail is unbelievable.†He said that it is predicted that the “steel peak period†will be ushered in the next 10 years, which is “a realistic viewâ€.
Is the market effective?
There are also many people who do not agree with such a optimistic view of China. For example, Goldman Sachs analysts believe that China's industrial activity is slowing down more than the official macroeconomic data suggests, and demand for all metals will continue to be frustrated by the mid- to long-term deleveraging process of debt. Start.
Only time can prove who is interpreting China is correct, especially since many parts of this equation will change, and each of them faces a large number of unknown factors. However, the bottom-up analysis of Rio Tinto and BHP Billiton on various factors affecting China's steel demand is still missing the problem of excess steel production in the country.
Xu Shaoshi, director of the National Development and Reform Commission of China, said that industrial overcapacity is "the biggest problem facing China's current economy." Most of the excess capacity comes from the steel industry, which is evident from the industry's low profit margins, weak profitability and bottoming out of domestic steel prices. Overcapacity means that the market is inefficient, steel mills produce more than demand, production is only to generate cash flow and maintain debt repayment, but at the same time with the risk of a chain reaction caused by drastically reducing inventory and small debt defaults. This also exposes the steel industry to the risk of direct government intervention in the form of mandatory closure of production capacity, which has occurred in the surrounding areas of Beijing, which has suffered from smog.
Steel production in the next 15 years may indeed grow at an average rate of 1%, but such a modest long-term forecast may mask the severity of what Rio Tinto Tulpule calls "shock." This logic is very similar to the iron ore producer's other idea that they believe that their low-cost production will replace high-cost production and force the market to rebalance. This belief in the efficiency of the iron ore market is why it is widely believed that prices will not fall below $90-100 per ton. Of course, when the price really fell, this view was overturned.
The reality has not been as efficient as the theory thinks. High-cost manufacturers may not accept the fate in the face of acceptance, but will continue to struggle. The cost itself is constantly changing, and now with the weak commodity prices fueling a vicious cycle of cost declines, costs are falling. It turns out that the iron ore replacement cycle is far more confusing than expected, which is why even after the recent price hike, it is still struggling below $60 per ton. After previously underestimating the inefficiency of the iron ore market, another similar danger now is that you may underestimate the more serious inefficiency in the Chinese steel market.
The strong gap between the two extensions on the "China's steel peak" is not important. After all, in the same camp, what is the difference between the two views of 40 million tons? However, the common views of the two extensions on China are gradually farther away from the views of most other critics at present, which is truly peculiar. (Finish)
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