World steel demand is forecast to cool on account of a slowdown in China

World steel demand is forecast to cool on account of a slowdown in China and other emerging economies, posing risks for Australia's iron ore exporters.

The World Steel Association reduced its growth forecast for steel use down to 2 per cent in both 2014 and 2015, following growth of 3.8 per cent in 2013. The decision revises a projection made in April that steel use would grow by 3.1 per cent this year.

"The slowdown in China's steel demand, reflecting the structural transformation of the economy, has contributed significantly to our lower global growth projection," said Hans Jürgen Kerkhoff, chair of the WSA economics committee.

Demand for steel in China will grow by just 1 per cent in 2014 and 0.8 per cent in 2015, compared with growth of 6.1 per cent in 2013. The association's report cites a "rapid cooling" of the country's real estate sector, tapering of investment and weakened business sentiment for the slowdown.

Steel use will come off the boil in the BRIC nations and Africa, and is forecast to decline in Central and South America. Demand for the commodity will also go backwards in the former Soviet states and Russia, on account of the crisis in Ukraine and weak infrastructure investment.

The revision comes as Australia's major iron ore exporters ramp up production, with Rio Tinto and BHP Billiton both having recently announced they will increase supply. On Monday, BHP outlined plans to overtake Rio as the country's lowest-cost iron ore producer and to grow exports by 65 million tonnes over three years.

Andrew Driscoll, head of resources research at CLSA in Hong Kong, said the revised forecasts would have no impact on the big miners' investment decisions.

"Even at much lower iron ore prices, these businesses still make good margins and generate strong returns," he said.

"I don't think lower projections for global steel demand growth will impact capital investment decisions."

Mr Driscoll said the big two miners were well-positioned on the cost curve to withstand pressures even if steel demand and iron ore prices underperformed expectations.

Both BHP and Rio have forecasted Chinese steel production to exceed one billion tonnes a year. But only last month, the deputy secretary-general of the China Iron and Steel Association, Li Xinchuang, warned that Chinese steel production could not grow beyond 900 million tonnes. He suggested the miners' optimism was a "story" they told investors.

The good news for iron ore producers in the WSA report came from developed economies, particularly the US where demand is set to increase by 6.7 per cent in 2014.

"Recoveries in the EU, United States and Japan are expected to be stronger than previously thought, but not strong enough to offset the slowdown in the emerging economies," Mr Kerkhoff said.

Such is the significance of China that global steel use would have risen by 3 per cent in 2014 if that country were excluded.

The WSA expects a turnaround in most developing economies in 2015, with resurgent demand forecast in Africa, the Middle East and South America, while the boom in developed economies is expected to slow. That would mean global use stays flat at 2 per cent, according to the forecast.

The growth forecast for China could increase if the government uses targeted economic stimuli and eases restrictions on the real estate market, the report notes.



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