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Outlook for Chinese steel: thumbs up or thumbs down?

Screen Shot 2015-11-18 at 11.49.34 am

Outlook for Chinese steel: thumbs up or thumbs down?

Sometimes a picture tells a thousand words. This week, Macquarie published the latest instalment of their China Steel Survey that has been tracking Chinese steel sentiment since mid-2011. The question is simple: “Are you positive or negative on the market over the next three months?”

Whether the respondents were steel mills, steel traders or iron ore traders in China, the answer was basically the same: negative. As illustrated below, sentiment in the Chinese steel sector – as measured by Macquarie’s ongoing surveys – is now at the lowest level on record.

Screen Shot 2015-11-18 at 11.46.39 amThis is surely negative for steel demand. And this, in turn, is surely negative for iron ore demand – the key ingredient to make steel. This potentially spells even more trouble for the iron ore price – a primary determinant of revenue for Australia’s major mining companies: BHP Billiton, Rio Tinto and Fortescue.

Indeed, the situation in iron ore is even worse than what is illustrated by Macquarie’s chart above. While this chart tells us something about iron ore demand (i.e. it’s weakening), it tells us nothing about supply. Well, upon examining the most recent growth rates of iron ore production of the major producing companies (Vale, Rio Tinto, BHP Billiton and Fortescue), supply is growing at a staggering 7 percent per annum.

Weakening demand and strengthening supply means lower prices… It’s as simple as that.

Andrew Macken is a Portfolio Manager with Montgomery Global Investment Management. To invest with Montgomery domestically and globally, find out more.


Andrew Macken is the Chief Investment Officer of the Montaka funds and the Montgomery Global funds. He established MGIM in 2015 in partnership with Montgomery.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. The last I heard, steel production in China is forcast to fall to 600 Million Tonne. Not grow to 1 Billion, as BHP keep believing. The exact quote was ” steel mills won’t be mothballed, they will be bulldozed, because they will never, ever be needed again”. In the boom, BHP were making $1 Billion every month from iron ore alone. $50 to $19. To Quote Andew Forrest ; ” They Barbaqued Tens of Billions of Dollars “. It’s the biggest business management incompetence ever in this country. Hopefully a book will be written about it one day. Roger ??? RIP – BHP.

  2. An aussie company BIsalloy (bis) reported yesterday 23/11/15 that its Chinese partners steel operations are currently increasing sales in the tough steel market alluded to in this article.If they can increase sales in Chinas tough steel market today how will they do when the market turns.

  3. Figure 1 shows wild and frequent swings in sentiment suggesting there has been little long or even medium term conviction in the Chinese steel industry. Yet at the same time international mining company executives were ploughing billions into new mines citing never ending Chinese demand.

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