China steel production to rise through urbanization

BHP Billiton Ltd. (NYSE:BHP), the world’s largest mining company, sees steel production in China increasing to 1.1 billion metric tons in the next 10 years as urban development drives long-term demand.

“China’s urbanization has a long way to run and that is going to require a lot of steel,” Chief Executive Officer Andrew Mackenzie told reporters today in Beijing, as he concluded a tour to visit customers in Asia. China produced 779 million tons of steel last year, according to the World Steel Association.

China’s Premier Li Keqiang last month called on regional authorities to help stabilize expansion as the nation seeks to meet its economic growth goal of about 7.5 percent. The world’s second-largest economy is projected to grow 7.3 percent this year, which would be the weakest pace since 1990, according to an analysts’ survey in May.

“There’s a bit of overcapacity in the property market, which probably led to temporary softening in the demand growth for steel,” Mackenzie said. “Hopefully there will be renewed growth, particularly growth in the way of making more use of high-quality, low-cost iron ore and metallurgical coal produced by Australia. We are ready for that.”

BHP, based in Melbourne, raised its full-year iron ore output guidance in April to 217 million metric tons, while Rio Tinto Group posted record first-quarter output, swelling supply.

Falling ore

Iron ore, a key steelmaking ingredient, had its sixth straight monthly decline in May, the longest losing streak on record, with supplies rising from Australia and Brazil just as demand growth in China cools. Prices may average $109 a ton in 2014 and $80 next year, according to Goldman Sachs Group Inc.

“We probably don’t see the case for quite the scale of investments in growing our iron ore and our metallurgical coal business like we did in the last 10 years,” Mackenzie said.

Demand for iron ore and other commodities needed in new urbanization may be driven by India and South East Asian nations to 2030 as China’s growth moderates, Michiel Hovers, BHP’s vice president for iron-ore marketing, said May 7 in Singapore. Of the 1.2 billion people forecast to move from rural areas to cities in that period, China will probably account for 240 million, he said.

BHP got 43 percent of its earnings before interest, taxes, depreciation and amortization from iron ore in the 12 months to June 30, 2013. It generated 29 percent of its revenue in China in that period, the most in any region, according to data compiled by Bloomberg. Sales to Japan accounted for 12 percent, and other Asian nations for 21 percent, the data show.

“China is in a transition from an infrastructure driven economy to a consumer economy,” Mackenzie said. “There will be short-term volatilities, but longer term things are looking pretty positive in the way they are able to handle this transition.”