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China’s steel growth slows, but ore demand robust, says Fortescue

Fortescue Metals chief executive Elizabeth Gaines says growth in Chinese steel production is expected to slow to between 3 per cent and 4 per cent this year, but will still benefit from further state investment in infrastructure to stimulate the economy.

The iron ore miner also talked down concerns that Beijing could use Australian commodities as economic leverage against the Australian government, saying the strength of China’s steel industry and a deficit created by a mine accident at Brazil’s Vale meant restrictions on iron ore imports were unlikely.

Speaking on the sidelines of the Boao Forum, an annual meeting of business leaders and politicians on China’s tropical Hainan Island, Ms Gaines said there was no evidence of a contraction in steel production, which drives demand for iron ore.

China’s steel production rose 12 per cent to a record 928 million tonnes in 2018.

“In the first couple of months of this year steel production has been up year-on-year,” Ms Gaines told The Australian Financial Review.

“One of the levers the Chinese government has at their disposal to stimulate the economy is through investment in infrastructure. We have seen that recently with more announcements of further infrastructure projects in China, whether that is high-speed rail or new airports.

“There seems to be a view it [steel production] could be in the range of 3 to 4 per cent growth. From the discussions we are having with our customers here in China, that would be an indicator.”

Fortescue has long argued the discount between higher quality iron ore and its lower quality iron ore was cyclical, not structural. While the Chinese government’s crackdown on pollution forced a shift to higher quality ore, the slowing economy means demand for inferior ore is now increasing as steel producers look to protect their margins by cutting costs.

“Certainly towards the end of last calendar year, we saw steel mill margins come under pressure. As we came into the early part of this calendar year in January we started to see very strong demand for our products,” she said.

“In an environment where steel mills are focused on their input costs and they are looking to lower their input costs to protect their margins, and we are seeing very strong demand.”

MySteel analyst Du Hongfeng said the discount for Fortescue’s April index-linked shipments had fallen to 13 per cent from 16 per cent the previous month. This compares to a 40 per cent discount in the same period a year ago. “The lower grade iron ore saw a stronger demand because of the falling profits from Chinese steel mills,” Mr Du said.

China’s leaders have ordered municipal governments to renew heavy investment in infrastructure projects to stave off economic stagnation as the economy’s growth slows to an expected 6-6.5 per cent this year. However, the economic slowdown has started to hurt Australia’s coal industry, with imports restricted and delayed in an effort to prop up domestic coal prices.

Ms Gaines said this was unlikely to happen with iron ore because of the huge demand in China for the commodity, particularly given the deficit created by the collapse of a dam at a mine owned by Brazil’s Vale. “We haven’t seen any impact on iron ore imports – absolutely not,” she said when asked whether there was any risk that Australian commodities could be restricted by China for political reasons.

She said Fortescue did not have the short-term capacity to materially increase volumes to make up the deficit from the Vale accident.

There was optimism in China that Beijing would reach a trade deal with the United States, although this would have little direct impact on Fortescue’s operations as most of the steel produced in China is consumed domestically.

Ms Gaines said there was no time frame on deciding whether to go ahead with Fortescue’s magnetite Iron Bridge project, saying it was still talking to its Chinese joint venture partner Baosteel and Taiwan’s Formosa Group

Fortescue recommenced shipments from Port Hedland on Tuesday after destructive Cyclone Veronica forced ports on the Pilbara coast to shut down from Friday. The closure was estimated to have halted the shipment of about 2.4 million tonnes a day of iron ore at a spot price of $US86 a tonne.

Fortescue reported net profit of $US644 million ($900 million) for the six months to December 31, down from $US681 million for the same period last year.

Revenue was up 10 per cent on the second half of 2017-18, to $US3.54 billion, as Fortescue benefited from an increase in its average realised iron ore price, from $US40 to $US47 a tonne.
Source: Australian Financial Review

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