BHP and Rio see solid rebound in China’s steel sector
BHP expects steel production in China to increase slightly this year, if the world’s biggest consumer of raw materials avoids a second wave of coronavirus infections.
In a detailed review on its key commodity markets on Tuesday, the Anglo-Australian miner noted that industrial activity was improving in China, spurred by supportive credit and fiscal policies, although there were still considerable variations across provinces.
BHP said blast furnace utilisation rates in China had increased to almost 79 per cent in April, up from 73 per cent earlier in the year, while demand for reinforcement bars — steel products widely used in construction — was at or above normal levels for the time of year.
If the country does not experience further outbreaks of Covid-19, steel production “may rise slightly” in 2020, BHP said in its quarterly trading update.
BHP’s comments echo those made by arch rival Rio Tinto, whose chief executive Jean-Sébastien Jacques said last week that China was “restarting” and “demanding” lots of raw materials.
China is the world’s biggest producer of steel — it churned out about 1bn tonnes of the metal last year — and also the largest consumer of iron ore, the main ingredient.
The resilience of the country’s steel industry has been one of the most surprising features of commodity markets during the coronavirus-induced downturn.
Even at the height of China’s virus outbreak, the country’s big steel mills remained operational, but had to lean more heavily on overseas suppliers of ore such as BHP as travel restrictions made it difficult to source domestically. The Melbourne-based miner produced a record 60m tonnes of the commodity in the first quarter of the year.
That provided a powerful prop for seaborne iron ore prices, which have stayed above $80 a tonne throughout the wider price crash in commodity markets. That has underpinned profits at BHP and other big producers that can dig the rust-coloured rock from the earth for just $13 to $14 a tonne.
Supply disruptions have also boosted the commodity. Last Friday Vale, the world’s biggest iron-ore producer, slashed its 2020 output forecast to 310m-330m tonnes, from 340m-355m previously, because of bad weather and delays restarting operations in Brazil.
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However, extremely weak demand in China during the first two months of the year has raised fears about a big build up of steel inventories that could take months to digest.
BHP said finished steel inventories in China were falling but added they were “still very high relative to history.” It also said steel production was likely to contract “by a double-digit percentage” outside China in 2020.
“Steelmakers from a variety of regions, including Europe, the Americas, India and Japan have announced or signalled full shutdowns or curtailments,” it said.
Analysts say the steel market is now dangerously unbalanced, with an even greater reliance on the world’s second-biggest economy.
“Steel production cuts outside China are making it even more a single-horse race than it already was, raising the risk that cargoes not required by smaller importers could be dumped on China’s shores,” said Susan Bates, commodity strategist at Morgan Stanley.