BHP Says China Demand for Iron Ore to Remain Strong for Several Years

SEATTLE (Scrap Monster): BHP chief commercial officer Rag Udd says Chinese steel makers will maintain current production rates for several more years and that iron ore prices should remain above $80 a tonne, bolstered by growing demand in new sectors such as electric vehicles.

China was the source of 62 per cent of BHP’s revenue last year, with Chinese steel makers consuming most of the iron ore mined by BHP in Western Australia’s Pilbara region and a small portion of the coking coal mined in Queensland.

Udd said investors were too fixated on the slowdown in the Chinese property sector, which uses large volumes of steel, and had taken less notice of the strong growth in steel demand from other areas, such as machinery and electric vehicle manufacturing.

“I still hear conversations taking place about residential construction markets tanking in China. But the equal and opposite conversation that gets missed is that machinery has gone from single digits to over 30 per cent of steel demand. EV production has gone up. Anything to do with decarbonisation has gone up,” he said.

“So you’ve got a country that’s actually running at that billion tonnes of steel production per year rate, and has been quite consistently for the last six years, and I can see a pathway for that continuing in the next few years.

“That is not based on any one sector, but based more on the resilience and the adaptability and how fast China moves when it pivots to new industries and opportunities,” he said. “The Chinese market is much more resilient and agile than people recognise.”

Economists and strategists have forecast a slowdown in the Chinese economy this year on the back of a property market downturn and the imposition of tariffs on Chinese exports to the United States. Chinese media reports have also suggested steel production cuts could be enforced by Beijing.

Last week, US President Donald Trump imposed a 34 per cent tariff on Chinese exports to America, on top of the 20 per cent he imposed earlier this year, bringing the total new levies to 54 per cent.

China has since retaliated ratcheting up a trade war with a raft of measures, including additional tariffs of 34 per cent on all US goods and limiting the export of some rare earths.

Australia’s Department of Industry expects the nation will export iron ore with a face value of $117 billion in the year to June, and predicts iron ore will average $US85 a tonne, excluding the cost of freight, in 2025.

The cost of shipping a tonne of iron ore from the Pilbara region to North Asia was $US9.30 on April 3, according to S&P Global Platts.

Australia is expected to export about 908 million tonnes of iron ore this year, but will face new competition from Africa’s Guinea next year, where Rio Tinto and Chinese state-owned entities are building new iron ore mines in the Simandou mountains.

While Simandou is likely to only produce small volumes next year, it is expected to ramp up to 120 million tonnes before 2030.

Udd said the iron ore market could cope with the new supply, given that many existing mines would start to exhaust their supplies.

“The conversation around Simandou being a Pilbara killer is overplayed. We are talking about 120 million tonnes in a global contestable market of well over 1.5 billion tonnes,” he said.

“The thing that sometimes gets missed here is depletion, and some studies estimate depletion of almost a quarter billion tonnes of iron ore coming out of the market between 2025 and 2035.”

Udd said he expects $US80 to remain a floor in the iron ore market after first production at Simandou.

“We still see cost support in the $US80 to $US100 price range moving forward – I think depletion will factor into it. I think inflation will be the other element that kicks in,” he said. “I actually see quite a healthy market moving forward.”

Ore with 62 per cent iron was fetching $US102.95 a tonne on April 3, according to S&P Global’s Platts.

JPMorgan analyst Lyndon Fagan said fears of an iron ore price crash were “overblown” and miners such as Fortescue were among its top picks. The broker predicted iron ore would average $US100 a tonne this year, $US95 a tonne next year and $US94 a tonne in 2027.

Courtesy: www.afr.com