chinese demand for steel and coal

some interesting facts on demand for steel and coal


BHP Marius Kloppers speech on demand & supply in latest results presentation

“Starting with the demand side, I don't need to remind you what all of you have lived for over the last year. That in the developed economies the rates of growth are slowing down, driven by credit and liquidity issues in the financial system, the impact of high food, energy and raw material price inflation and the knock-on impact on businesses and consumers



The developing economies are not completely isolated. In China, we slowed perhaps a couple of percentage points, but it is really on this topic that I want to say a few words just to tell where that slowdown is occurring and what the impact on us is. We see the slowdown really occurring mostly in the light manufacturing sector. Those sectors that are predominantly export-oriented. For the domestically driven, investment driven sectors, such as the steel business, which are driven by domestic demand conditions and the maritime nature of the Chinese economy, we see these businesses performed well despite increases in the energy and raw materials costs.



Now having just spent some time in Beijing in interaction with our customers over the past week, they absolutely support this outlook that I have just stated. The long-term fundamentals for these economies remain intact. Just take a look. China has averaged at about 10% growth for an extended period of time. And what I want to emphasis is the cumulative nature of growth. From about 2001 that 10% growth became important not only as a percentage, but really as an absolute value in the world economy. At the same time, in about 2002, 2003,we've also started seeing an acceleration of growth in the other developing economies, such as India, but also South East Asia and other economies.



And I also want to point out in particular that each unit of GDP in a developing economy is about four to five times as material intensive as a unit of GDP in the developed economies.





As we've said China is mainly a domestic demand story, and the bulk of demand in raw materials is driven by investment and private consumption. Trade is an important element of the activity and we've spoken about some of those light manufacturing sectors are facing some pressure at the moment. And obviously trade reflects the integration of China into the world economy. But growth continues to be driven in a domestic fashion. Why? The demand is all about industrialization and urbanization. And let's just take a few figures to just step back, look at the effect of cumulation and trying to create a picture in your mind to what is going to happen.



China is forecast to add 40 billion square meters of floor space in the next 20 years at about 75 kilograms of steel per square meter there would be over the next 20 years, 3 billion tonnes of steel, just going into the construction sector. Now, let's put that in perspective. From '63 to 2007 half a century, Australia supplied just about 3 billion tonnes of contained iron ore units.That means that in construction alone and there is obviously many, many other sectors that consume steel. But just in construction, we would have to supply from the pallbearer the equivalent amount that was supplied in the last - almost a century. But we've got to do that in a much shorter timeframe. So let's take another look. The industrialization of China means that as we can see here the accumulated steel stock in China, is already as much as the US did in the last - most of the last century, from 1900 to 1970.



At growth rate similar to this year, by 2015, China will have accumulated more steel in inventory than the US achieved in its entire history. And that means that there will be a very large call on iron ore, manganese and eventually coking coal. This call really has got no historical parallel. But as nations industrialize, they also become heavy users of energy, while China's energy consumption is about 20% of world primary energy use and contrast that against metals and cement and so on where it's between 30 and 50% world demand.



Take note that as we show on this slide, China has accounted for half of the world's incremental energy growth. The supply system is struggling to meet this demand and has had a very noticeable impact on the world energy feedstock prices. But, more importantly, the world's energy needs and China's energy needs have also revealed a strong reliance on coal. And this is a particular challenge for China, which is trying to rebalance its energy mix for many reasons, environmental not being the least of it.



As the world becomes increasingly concerned about climate change and the contribution from gas, nuclear power looks safe to grow most strongly, placing a premium on long-term secure and reliable sources of supply for these products, products which we happen to supply.



So, the demand side is clearly important. China is clearly important. However, it is only one half of the equation. The other half is the supply side.



Our industry is faced as an industry and will continue to face serious challenges on the supply side, as operations are pushed harder in order to produce this incremental demand.



There are a number of well documented factors that people have spoken about that limit the ability for miners to expand production. And they include on the left-hand side here, things like equipment stress, industrial action and wage disputes, labor and equipment shortages, inflationary pressures and then infrastructural problems and things like power, which we've seen in China,South Africa, Chile, Brazil heading that way and so on and also in the existing operations a deterioration of ore grades being mined, particularly in the base metal businesses. And we are starting to see export tariffs and quotas being imposed. All of these things make it more difficult to expandproduction as an industry.



However, those factors on the right-hand side, which impact future demand -supply growth, have a greater impact on the future supply growth dynamics. Firstly, it doesn't matter how much we dig out of the ground, if we can't getit our customers it just doesn't count. They can't use it.

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We are also seeing that as an industry we are not developing very large newterritory, new ore bodies. We've got no new Escondida, we've got no new Bingham Canyon, we've got no new El Teniente, we've got no new Grasberg and so on. None of those are being developed. Instead developments are increasingly likely to be lower grade and higher risk.



On top of this, we've got equipment shortages and rising capital costs, causing longer lead times. And we've got higher nationalism which increasesthe risk and knocks out some of those speculative capital, project finance,smaller players and so on that mooted entering into these new environments. All of these things are going to constrain supply and it's compounded by the fact, that the absolute size of the markets are now much larger.



So let's just continue on this theme for a second. The issue of truck and tires are well known and people have written about that a lot. But we are also seeing long lead-times in shovels, draglines long-walls. In some cases people express concerns about the future availability of explosives. And not only do we face that from our suppliers as an industry and I want to continue to talk about the industry, but those suppliers face constraints from their suppliers. For example, the growth in the wind farms has meant that there is shortage of large bearings. There is a chronic shortage of capacity to manufacture the large castings and forgings which we require for mills and super class trucks. And we have got an aging work force producing many of these things in the industry. So it's not just an issue of adding new capacity and equipment. The combination of equipment lead-time delays, tightness in the labor market and all of those things that we've just spoken about is flowing through to project schedules for the industry”


regards


stured

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