China Metals and Minerals Outlook for 2014

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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--China's imports of iron ore reached a record level of 74.58 million tons in September, which represented an increase of 8% from the previous month and 15% from September 2012.

China's domestic steel production also hit record levels in September, increasing 100,000 tons per day up to 2.14 million tons (Mt) per day. Steel showed an increase of about 8% when compared to the total production growth for the first eight-month period in 2012.

Despite hitting record levels in 2013, with a growth rate of 6% and a total of 699.7 Mt - which shows the impact of the government's stimulus measures focused on infrastructure - growth in the sector is expected to drop to 3% in 2014 as the government's effort to rebalance the economy continues to restrain investment activities.

"The key risks in the global economy--the eurozone crisis and a hard landing for the Chinese economy--have continued to stabilize through the past six months," said WSA economic committee chairman Hans Jurgen Kerkoff, speaking on the release of the World Steel Association's (WSA) short range outlook (SRO) for 2013 and 2014. "Our underlying assumption remains that the U.S. will resolve its fiscal constraint soon. The correction in the eurozone has been more severe than we forecasted but the improvement seen recently is now expected to continue for the rest of 2013. Major emerging economies, particularly India and Brazil, have not performed as hoped mainly due to key structural issues. These factors have led to a lower steel demand performance than predicted across the world, with China being the one exception with the forecast of 6% growth in 2013. Thus, despite steel demand growing by only 0.7% in the rest of the world, total global steel demand will grow by 3.1%."

In 2014, a continued recovery in global steel demand is expected, but with lower growth in China. "With risks within the developed world receding, there is some uncertainty emerging from developed countries due to unresolved structural issues, political instability and volatile financial markets. All in all, despite economic conditions for the global steel industry remaining uncertain and challenging, we are forecasting further growth for steel demand for 2014," Karloff said.

But not everyone agreed with WSA's forecast. "We will have to wait and see, but I don't believe the size of the decline is correct," said Liu Shenjiang, vice chairman of the China Iron and Steel Association. "The Chinese economy has stabilized, and next year it will be operating at about the same level. Demand will be quite stable."

Another bellwether metal, copper, also experienced a dramatic rise in imports to China in September, totaling 457,847 tons of unwrought copper and copper products. This showed an increase of 15.96% year-on-year, according to statistics released by China's general administration of customs. The September copper import total was up 18.1% on this year's August figure. From January to September, imports of unwrought copper and copper products amounted to 3.26 million tons, which was down 10% from the corresponding period in 2012. Copper waste product imports were down 10.1% at 3.19 million tons, compared with the first nine months of 2012. In 2014, imports of refined copper are expected to rise, driven by the construction of power networks, rail lines and low-cost homes. Refined copper consumption could rise 5% to 6% in 2014, based on reports from major end users and producers. This would give a consumption total of about 8.6 million tons following the 8.1 million tons in 2013, according to state-controlled research.

Purchasing Manger Indexes (PMI) stayed in marginal growth areas over 50 in September. The official manufacturing PMI crept up from 51 in August to 51.1 and the Markit/HSBS PMI went from 50.1 to 50.2. However, the services PMI dropped to 52.4 from 52.8 in August. This was set against the government's official services PMI, which showed the sector's index rising from 53.9 to 55.4.

The difference between the government's PMI survey and that of Markit/HSBC's is that the government's is weighted toward larger and state-owned companies, while the latter surveyed smaller private enterprises. The variance between the two could mean that China is going to experience a two-tier recovery, with the larger and state-owned companies leading the way. The services industry has, to date, weathered the global slowdown much better than the factory sector.

Surveys showed that business expectations had weakened during September. Respondents reported muted client demand. As the government seeks to expand domestic consumption to drive growth, it plans to open up the hitherto-protected services sector to foreign competition and to test financial reforms in a new free trade zone in Shanghai. Services accounted for about 45% of China's economy in 2012, and the sector was the country's largest employer.

King Coal in China is unlikely to lose his throne, although the government is scheduling to close 2,000 smaller, inefficient, unsafe and environmentally unfriendly coal mines by 2015 and have 50% of the country's power supply sourced from hydropower and renewables by 2030. Coal currently accounts for 70% of China's total energy consumption. The country is on the verge of becoming the world's largest consumer of coal-derived electrical power. The additional power target is 88 gigawatts (GW) annually through 2030.

The coal industry will experience sustained and major challenges from 2013 onward. The major coal-producing regions are located in difficult terrain in the northwest, where the fuel has to be transported to the high demand areas, mostly in the coastal regions. Coal dominates the country's freight transportation statistics, accounting for more than 40% of total rail freight, 20% of road freight and about 25% of waterborne freight.

It is forecast that by 2025, China will produce more CO2 and SO2 emissions from coal burning than the U.S., Japan and Canada combined. This presents foreign companies with market opportunities in providing techno product solutions to improve generating and environmental efficiencies and supporting safety best practices in the coal mines--rather than making once-off total project investments.

In 2012, China produced 3.549 billion tons of coal compared to the U.S. total of 935 million tons. In the same year, China imported 289 million tons of coal.

The IMF says that time is running out on China's growth model, driven by a world record investment rate of 50% of GDP and now afflicted by excess capacity and diminishing returns. China has picked the low-hanging fruit for catch-up growth, relying on the mass migration of cheap labor from the countryside, reports London's Daily Telegraph. The "reserve army" of peasants in the interior will have disappeared by 2020, but China and emerging markets will muddle through with average growth around 5.5%, higher than in the 1980s and 1990s, but never to repeat the roaring boom of the pre-Lehman crash years.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and nine international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.