New market study, "China Metals Report Q3 2010", has been published

Chinese steel demand will hold up due to the ongoing processes of industrialisation and urbanisation, but the pace of growth will slow. Instead of focusing on raising capacity, the industry should be eliminating outdated production facilities and addressing the problem of weak pricing power in iron ore negotiation, according to this latest China Metals Report from BMI.

The steel industry's performance in 2010 so far has been very strong and proved many pessimists wrong, but BMI warns that over-optimism among Chinese steelmakers could be their downfall, with a distinct risk of market saturation and mounting stockpiles if output growth rates are not curtailed. The January- April period saw Chinese crude steel output grow 25.4% year-on-year (y-o-y) to 213.87mn tonnes. Flat steel production in the period amounted to 79.7mn tonnes, while long production totalled 103.8mn tonnes. Prices for flat products on the Chinese market declined sharply in Q210 in what appears to be more than a short-term correction.

The strength of the flat steel market depends heavily on the performance of the international market, in particular the stimulation of consumer demand. Troubles in the eurozone and the slow yet steady recovery in North America indicate that a strong revival in the Chinese flat steel industry is unlikely to occur until 2011. The situation in longs is somewhat better, due to the government's stimulus measures and their impact on construction. However, the positive effects of the government's CNY1trn investment in municipal infrastructure in 2010 are being countered by the effects of real estate regulation and tightening of lending. Fears over these trends prompted a massive drop in long products prices in Q210. BMI believes that market corrections will lead to a recovery in prices in H210.

BMI forecasts 9.3% crude output growth in 2010, a decline from 13.2% in 2009, as we expect liquidity curbs to control inflation will have an adverse effect on domestic demand, though the market is robust enough to continue growing. However, BMI shares the government's concerns over the impact of shortterm volatility and the desire for better management. Individual provinces are resisting reform as they wish to retain market share and protect taxes and jobs during the economic downturn. In the long term, unless steelmaking capacities are bolstered with new and more efficient capacity that meets domestic requirements, China's steel imports will accelerate from 2012. By 2014, imports could reach 35.5mn tonnes, up by over 140% from an estimated 14.7mn tonnes in 2009. However, with exports more than doubling to 71.5mn tonnes in the same period, China's steel trade surplus is still expected to climb. BMI estimates the surplus will rise by nearly 70% from US$13.04bn in 2009 to US$22.11bn in 2014.

BMI's forecast model states that Chinese primary aluminium output will reach 15.01mn tonnes in 2010, an increase of 15.8% y-o-y. We expect production to reach 22.4mn tonnes by 2014, an increase of 73% compared with 2009. BMI forecasts an 18% rise in aluminium consumption to 16.5mn tonnes in 2010 as a result of the economic recovery. However, with BMI forecasting aluminium output of 17mn tonnes, based on the 53% y-o-y growth to 4.05mn tonnes witnessed in Q110 and quarterly output averaging 4.3mn tonnes in Q2-Q409, there is a danger of over-supply in the Chinese market. Government efforts to address the problem by ending subsidised electricity supply and doubling surcharges on high consumption electricity users could make efficient aluminium production less competitive in addition to taking out smaller and less efficient capacity. BMI believes that these measures could threaten the closure of up to 2.5mn tonnes per annum (tpa) of primary aluminium capacity, depending on the strength of the international economy. However, the reduction and elimination of capacity will be accompanied by the development of more energy-efficient smelters. The China Nonferrous Metals Industry Association estimates that 2-3mn tpa of aluminium smelting capacity will come online in 2010 alone, bringing total capacity to up to 23.6mn tpa and creating surplus capacity of 6.6mn tonnes