The supercycle is so over, iron ore edition | FT Alphaville

The supercycle is so over, iron ore edition

From Bloomberg:

BHP Billiton, the world’s biggest mining company, said China’s steel production is slowing as the world’s fastest-growing major economy starts to shift to focus more on consumers than large building projects.

“The big infrastructure build clearly will come to some end,” Ian Ashby, the Melbourne-based company’s president of iron ore, told reporters today in Perth. “Steel growth rates will flatten, and they have flattened, and we still see positive growth out to the middle of the next decade.”

Ashby is of course referring to what everyone knows anyway, which is that the country can’t keep building airports, railway lines and apartment buildings at its recent run rate, forever. Even the Communist Party has openly acknowledged that the economy is imbalanced, with too high a proportion of capital investment versus consumption. Party leaders may even become pro-active about changing that in the new five-year plan, but either way, eventually things will change.

A Wood Mackenzie analyst, Paul Gray, told Reuters that he doesn’t see this flattening of growth affecting the plans of BHP and rival Rio Tinto for big expansions of their iron ore production over the next several years. It’s not a flattening of demand, after all; there will still be growth.

And the two big Australian miners have the advantage that their mines are some of the lowest-cost in the world. If Chinese demand slows, they’re betting that higher-cost pits in China, India, Brazil and elsewhere in Australia will face the squeeze first. But their current projects are increasingly expensive: BHP’s planned iron ore terminal off the coast of Port Hedland in Australia could cost $15bn, so the stakes around getting this right are high.

So, about this supercycle. Credit Suisse’s analysts published a view of their internal debates over the China outlook, after Dong Tao, their chief regional economist for Asia ex-Japan, came out with a rather bearish take on the China outlook, stating that the commodities supercycle is over. Anyway, not all of his colleagues agree, particularly those in commodities:

Where We Agree

Across Securities Research, we agree that

  1. A hard landing is unlikely.
  2. Credit conditions have improved.
  3. A 2009 style of stimulus later this year is unlikely.

Areas of Greater Uncertainty

China Economics Team’s Core Views

  1. Liquidity has improved, but the demand rebound is likely to be muted.
  2. China’s demand super-cycle for commodities is over.

China Basic Materials Team’s Core Views

  1. The stagnant growth outlook for China’s infrastructure and property sectors, combined with construction-biased Chinese demand, marks the end of the Chinese commodity super-cycle. We expect China to soft land and commodities to feel most of the “pain.”
  2. Cyclical factors – such as “normalization” of the high basis, correction of over-production/construction, and the rippling effects of the property slowdown on related sectors – should make 2012 a difficult year for Chinese commodity demand.

Global Commodities Research Team’s Core Views

  1. Chinese basic material demand is likely to remain robust in 2012, with the weakest period already behind us
  2. The key driver, fixed asset investment, remains strong, while industrial production and exports are set to rebound in Q2.
  3. Chinese GDP growth is likely to remain in the 8%-9% range over the next year or two, with the contribution to the global total continuing to increase, given the much larger base. We do not think that it is possible to have 8% growth with weak investment given that investment accounts for half of GDP.
  4. Although the intensity of commodity growth is likely to slow over time, we expect this to be a gradual process, not a step change, this year. Still, as a result of strong Chinese demand, coupled with a gradual recovery in the West, global commodity prices are likely to, on average, stay well above the levels seen in the 1980s and 1990s – we believe that the super-cycle has further to run.

(H/T Also Sprach Analyst.)

Meanwhile – there’s this! Chinese steelmakers, big buyers of aforementioned iron ore, are struggling to profit from their core business. So much so that they are turning to growing pigs and organic vegetables. Well, one of them, at least:

Wuhan’s pig farm has quickly become the talk of the industry, but many of China’s powerful steel groups – which account for more than 40 per cent of global steel production and about 8 per cent of China’s gross domestic product – are also quietly expanding beyond their core business.

Exact statistics are hard to come by given limited disclosure by China’s state-owned steel groups, but “there’s no doubt that the diversification trend is growing,” says Zhang Changfu, deputy head of the China Iron and Steel Association, an industry representative body.

Related links:
World’s changed, man! World’s changed! China edition – FT Alphaville
A fate worse than a hard landing for China – FT Alphaville
Pettis on Europe and China – Calculated Risk