China's new cities 'to fuel demand' for iron ore

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Fortescue is the 3rd largest iron ore miner in Australia. How much can we believe in the words of vested interests?

China's new cities 'to fuel demand'
SCOTT MURDOCH CHINA CORRESPONDENT THE AUSTRALIAN MARCH 26, 2014 12:00AM

FORTESCUE Metals chief executive Nev Power has forecast that China will need to consume at least 800 million tonnes of steel a year for the next four decades if the nation is to maintain its rapid urbanisation.

The company used historical economic data, based on the US industrialisation era, to issue the bullish forecast that it believes will help underpin the volatile iron ore price.

In a speech to the Credit Suisse Asian Investment Conference in Hong Kong, Mr Power said Fortescue was confident that China would overcome its current economic slowdown as its urbanisation process continues.

China's economy last year grew by 7.7 per cent, which exceeded the government's official forecast, but it was the slowest expansion rate in 14 years.

The government has set the growth target at 7.5 per cent for the current year which a number of economists believe could be hard to achieve.

China's steel consumption grew by 8.8 per cent in the past year even though the nation's government has ordered that demand be deliberately weakened to help alleviate the worsening pollution crisis.

In the speech, Mr Power said China's urbanisation process would help keep iron ore and steel demand at strong levels.

"China is still only about 50 per cent urbanised, it could be even less," he said.

"Steel demand last year was ahead of GDP growth and no one picked that would happen, that was a surprise to me.

"But that shows that is still a lot of infrastructure projects under way in China."

Mr Power said it was likely that infrastructure development would help underpin the nation's commodity demand.

"China will need three to four decades of steel consumption of 800-900 million tonnes a year if it is to match the US over the 50 years that it took for it to urbanise," Mr Power said.

"So there is a chance, depending on the pace of urbanisation, that the peak steel ratio could be higher than that forecast level."

The bullish forecast comes as China has been to told it needs to consume less steel, as one method for reducing pollution across the country.

In Hebei province, the nation's biggest steelmaking region, the government has ordered production be cut by up to a third within the next two years.

A nationwide plan to reduce consumption is currently under consideration by the State Council, the equivalent of China's cabinet.

Mr Power said Fortescue was comfortable with its exposure to China, despite concerns over economic growth.

"Everyone is trying to work out what is happening in the iron ore market," he said.

"If I look around the world and which economies I want us to be exposed to you have to choose China every single day of the week.

"There is no better economy for us to have exposure to than China and we are placed to be a sustainable supplier to China."

Scott Murdoch is a guest of Credit Suisse at the Asian Investment Conference.
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