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Moderate expansion in China's steel demand

Xinhua | Updated: 2013-05-09 01:37

SINGAPORE - Industry insiders including senior executives from major iron ore miners like Rio Tinto and BHP Billiton, as well as officials from China's industry associations and steel enterprises, said they expected moderate expansion in China's steel demand in the near term.

However, China's steel mills' overcapacity is expected to remain for at least the coming two years, they said at an inaugural iron ore forum in Singapore on Wednesday.

Alan Smith, Rio Tinto's president for Asia, said China's steel demand is expected to grow at about 3 percent per annum. The demand for the whole country will continue to expand and peak at about 1 billion tons in 2030. After that, the potential huge demand from other emerging economies like India and Indonesia are expected to take over as the driver of iron ore consumption.

"I think there are still some growth stories to come. The iron ore story is by no means over," he said.

Alan Chirgwin, general manager of iron ore marketing at BHP Billiton, said the steel demand of China is expected to grow in the coming decade at half of the pace of the country's gross domestic production growth rate, which will be 7-8 percent annually.

China's steel production is expected to peak by the middle of next decade at around 1.1 billion tons, he added.

These views were also shared by industry insiders from China. Wang Liqun, Deputy Secretary General of China Iron and Steel Association, said he did not expect a sharp rebound for China's steel mills regardless of the national strategy of urbanization.

China will be pursuing quality in the ongoing process of urbanization, which will see the urbanization rate of the world's most populated country from slightly above 50 percent to over 70 percent, he said.

Instead, it will take quite a long period of time for the overcapacity in China's steel sector to be wound down. Therefore, "China's steel industry will come to a new stage characterized by moderate expansion, at a much slower and more stable pace," Wang said at the forum.

Yang Shufang, deputy general manager and director of research at custeel.com, said that she expected the iron ore prices to move between $100 and $150. The iron ore produced in China will be displaced first once the price falls below $114, thereby giving some support to the international iron ore prices.

The pricing mechanism of iron ore trade was another hot topic at the forum.

Since the pricing mechanism based on annual contracts was replaced in 2010 by the new short-term price finding mechanisms based on the spot market, the iron ore consumers from China became more and more vulnerable to sharp swings in the global iron ore prices. Derivatives designed to hedge risks have become more and more popular since then.

Chen Feng, chairman of China Chamber of Commerce of Metals, cited the example of Singapore Exchange's iron ore swap.

"Not only does it provide a tool for iron ore market players to hedge risks, but the function of the price discovery of the financial platform will be important in that it can be a good indicator," he said.

It is an irreversible trend for financial derivatives to be used in the iron ore trade, he added.

More than 500 delegates from China, Australia, Europe, India and Japan attended the forum, sharing their views on various aspects of the iron ore industry, including the pricing mechanism, how to use iron ore derivatives and iron ore trading platforms.

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