Miners Will Suffer as China’s Scrap Metal Supply Rises

Investors have finally embraced the reality of peak China steel demand, but most still underestimate how far demand will fall

Morningstar Equity Analysts 19 April, 2016 | 9:25AM

The recent rally in bulk commodity miners will end in tears. Iron ore has risen to $60 per tonne from a bottom of $37 in December, with leveraged mining stocks more than doubling from recent lows. We expect falling Chinese steel demand and rising Chinese steel scrap availability to cut iron ore prices by half. Shares of several heavily indebted producers are likely to fall by more than 50%. Our long-run forecasts are $30 per tonne for iron ore, versus the consensus of $55, and $75 per tonne for metallurgical coal, versus the consensus of $110.

Investors have finally embraced the reality of peak China steel demand, but most still underestimate how far demand will fall. Consensus sees Chinese steel use stabilising around 700 million tonnes, down modestly from a peak of 765 million tonnes. We expect demand to fall to 650 million tonnes by 2020 and 630 million by 2025 as faltering construction activity outweighs consumer-oriented growth. Rising scrap steel availability is a significant, but longer-term, threat.

Data scarcity and difficulty projecting scrap availability make it tough for investors to gauge the timing and magnitude of the risk. Leveraging academic work on the life cycle of steel products, we project China's domestic scrap supply to more than double by 2025, feeding greater electric arc furnace production and displacing iron ore and met coal demand.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Anglo American PLC2,366.67 GBX-5.73

About Author

Morningstar Equity Analysts  Morningstar stock and fund analysts cover 2,000 mutual funds, 2,100 equities, and 300 exchange-traded funds.

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