China steel demand to face headwinds in 2011

SHANGHAI: China's steelmakers face falling prices in the next few months as property market curbs begin to bite, in a trend that could spread to upstream sectors such as spot iron ore, coking coal and seaborne shipping rates.

After four years of double-digit growth, the pace of China's steel consumption will moderate in the coming year, slowed by steps Beijing took in September to limit multi-home ownership, rein in developers' access to land and tighten lending rules.

Construction accounts for half of steel demand in China, the world's largest producer of the building material, with total output last year contributing 46 per cent of the world's market.

Analysts say the property measures have now clearly filtered down to steel output, which had ramped up in the past two years to satisfy demand stoked by a government stimulus package of 4 trillion yuan in 2008 that set off a rash of new residential and office developments in major cities.

"In Beijing, we've already noticed a slowdown in the velocity of construction and the work sites are just not as active," said brokerage CLSA's Beijing-based analyst Scott Laprise, who tipped apparent steel demand to decelerate to between 5 and 7 per cent in 2011, from around 10 per cent in 2010.

"That's where the steel demand intensity has slipped and it will continue to fall. All the projects will slow down as developers try to delay launches in the hope of getting better prices."

In a sign that traders too expect steel demand growth to slow, rebar prices on the Shanghai Futures Exchange are in backwardation for the next four months, before marginally recovering in April.

With infrastructure-related construction also seen to moderate, analysts expect China's steel demand growth to slip to mid single-digits in 2011, compared to a forecast rise of about 11 per cent this year, setting the stage for a sluggish year for mills such as Baosteel Angang Steel and Maanshan Iron and Steel.

ENERGY TARGET CUSHION

Many Chinese steel mills are already under pressure to scale back operations in 2011 as Beijing continues efforts to curb power use by energy-intensive industries, after it ordered the shutdown of some 2,000 companies spanning 18 industries in the third quarter of this year.

The expected slower growth in steel output as a result of the energy curbs and efforts to cut stockpiles could cushion prices.

"China's supply-side production cuts aimed at reducing energy-intensive production are expected to reduce over-production and net exports as the industry consolidates," said Morgan Stanley's analyst Charles Spencer.

Forecasts for China's 2011 steel production growth by five analysts range between 4 per cent and 7 per cent, compared with an average of a 10.5 per cent rise this year to a record 625 million tonnes.

But even if steelmakers pull output closer in line with demand, the macroeconomic picture is clouded after China's surprise interest rate hike of 25 basis points last month is expected to further impact construction and slow economic growth.

RIPPLE EFFECTS

Every tonne of steel production requires 1.6 tonnes of iron ore and 0.6 tonnes of coking coal. Miners of those commodities, such as BHP Billion Ltd , Rio Tinto and Vale, will also face more tepid sales should Chinese steel mills, their largest customers, churn out fewer rebar rods and steel coils.