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Trump’s trade trauma won’t dent Chinese steel: FMG
China’s steel industry is set for continued strong growth over the next year despite US President Trump’s trade war, according to Fortescue Metals chief executive Elizabeth Gaines.
In an interview with The Weekend Australian at the China International Steel and Raw Materials conference in Dalian this week, Ms Gaines said the Chinese steel industry had been stronger than expected this year and the mill owners attending the conference were expecting another strong year ahead.
She said the escalating trade war between the US and China could raise some questions about the long-term outlook, but at present the steel industry in China was strong.
“The sector is buoyant,” she said.
“There is a lot of confidence in the Chinese steel industry.
“I am not getting the sense that there are any lingering concerns (about the trade wars), although protracted periods of protectionism are not particularly conducive to promoting global growth.”
Making her first appearance at the key Chinese conference since taking over as Fortescue CEO in February, Ms Gaines said the escalation of the trade war between the world’s largest economies “does create some question marks over the potential impact on growth”.
But she said China had a “very strong, robust economy and the Chinese have proven time and again they are very much able to control and potentially stimulate the economy if need be”.
“The economy is still growing at about 6.5 per cent at the moment,” she said.
“In circumstances where there was a slowdown, there are a number of opportunities for the government to stimulate the economy, regardless of the tariffs.”
Ms Gaines said China consumed most of the steel it produced domestically, exporting only 1 per cent of its production to the US.
“It is a very strong market,” she said of the steel sector. “The sense we are getting from our customers is that they are fairly confident in the sector.”
Her comments came after the secretary-general of the China Iron and Steel Association, Liu Zhejiang, told the conference that the industry needed to be prepared for the fact that next year might not be as strong as this year.
He said the steel industry in China this year was the strongest it had been over the past decade as a result of structural reforms that had seen small illegal mills and high-polluting mills forced out of the industry.
But he said there was “no reason to be more optimistic” about the outlook for next year and warned there would be “downward pressure” on the world economy as a result of the trade war.
The full impact of the trade war on the Chinese economy has yet to be felt but there are reports companies in the manufacturing sector in regions such as southern Guangdong province are seeing production cutbacks, with operations moving to lower-cost countries such as Vietnam.
Ms Gaines used the conference to make Fortescue’s pitch to Chinese buyers about its plans to produce a new, higher iron content product, which will be shipped from the end of this year.
Fortescue’s profits have been hit by the deepening discount being paid by Chinese buyers for lower iron content ore, compared to the benchmark price, as mills move towards less polluting production.
Fortescue’s product has one of the lowest iron contents of any major foreign supplier to China, but Ms Gaines argued that it also had the lowest cost structure of any iron ore producer selling into China.
Lower prices for its iron ore saw Fortescue’s net profit slashed over the past financial year, down by 58 per cent from $US2.1bn to $US878m for the 12 months to June 2018.
Its average revenue was down from $US53 a tonne in the 2017 financial year to $US44 a tonne.
FMG sold 156 million tonnes of iron ore to China over the last financial year, representing 92 per cent of its total production.
“We have a strategy to introduce a new product — the west Pilbara fines product — which will be a 60.1 per cent iron content product,” Ms Gaines said.
This compares to its current products, which have iron ore content of about 57- 58 per cent.
“The new product will price much closer to the benchmark (of 62 per cent iron ore content),” she said.
Ms Gaines said that Fortescue would be starting to ship the higher iron content product from Western Australia in December at an annual rate of 10 to 15 million tonnes.
This would ramp up significantly, to as high as 40 million tonnes a year, with the opening of its Eliwana mine and rail project in December 2020.
The Fortescue board approved the project, which will need a capital investment of $US1.275bn, at its meeting in May this year.
But Ms Gaines said there was still strong demand its existing iron ore products.
She said Fortescue was still able to get good margins because of its low cost structure.
“Our average price last year was $US44 a tonne but we still make $US20 a tonne from it,” she said.
Ms Gaines would not make any predictions about the future pricing.
“The iron ore benchmark price has been very stable now for some time. Analysts will have different views around the outlook.
“In the current environment, where steel mills are generating very strong margins, steel producers are looking to produce as much as they can.
“Using a higher iron content ore helps with productivity, but our iron ore is used with other grade ores. The mills blend Fortescue ores with other ores to get their optimal steel production.”
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