June 7 (Bloomberg) -- China is set to jolt iron ore off a six-month low after approving an estimated $23 billion of steel projects that will use the raw material produced by mining companies such as Rio Tinto Group and BHP Billiton Ltd.
The commodity will climb to $152 a metric ton in the second half, according to the average of five analyst estimates compiled by Bloomberg. The price declined to $131 a ton yesterday, near year-lows reached on May 23, according to The Steel Index Ltd. Coking coal, another key ingredient in making steel, may gain 7 percent to about $220 a ton, analysts forecast.
"Commodity prices are already close to the bottom and are set to rebound," Henry Liu, an analyst at Mirae Assets Securities Co., said by telephone from Seoul. "Prices will get a boost in the short term on speculation China will stimulate the economy. Real demand for steel depends on what incentives the government gives to drive investments."
China approved new steel mills in the past two weeks as it tries to sustain economic growth after April industrial output rose the least since 2009. New plants of Baosteel Group Corp. and Wuhan Iron & Steel Group were among the 228 billion yuan of projects approved by China's main planning agency, of which 65 percent are in the steel industry, worth the equivalent of $23 billion, Bank of America Merrill Lynch said in a May 30 report.
Iron ore generates the most revenue for both London-based Rio Tinto and BHP of Melbourne. China is the largest customer for both companies, providing 31 percent of sales to Rio and 28 percent to BHP in their most recent financial years, according to data compiled by Bloomberg.
Shares Rise
Steel production in China, the world's largest consumer of the alloy, may climb to more than 700 million tons this year, the China Iron and Steel Association said May 29. The nation produced 683 million tons last year.
Rio shares rose 2.2 percent to A$55.42 and BHP gained 1.5 percent to A$31.58 at the close in Sydney. Fortescue Metals Group Ltd. rose 2.9 percent. The benchmark S&P/ASX 200 Index climbed 1.3 percent.
Long-term drivers of iron ore demand remain intact, BHP Chief Executive Officer Marius Kloppers said May 15, saying the world's third-biggest shipper of the commodity expects China's steel output to climb to 1.1 billion tons by 2025.
Mining Profits
Rio Tinto, the second-biggest, is spending at least $15.6 billion to expand its iron ore operations to meet demand from China. BHP, Vale and Rio Tinto control about 67 percent of the total seaborne trade of iron ore, according to Bloomberg Industries.
Rio Tinto's profit may more than double to $13.2 billion this year and climb to $15.1 billion in 2013 from $5.83 billion last year, a Bloomberg survey of 18 analysts showed. The shares may rise 69 percent to AU$89.31 in 12 months, 13 out of 16 analysts surveyed by Bloomberg said. Iron ore accounted for 78 percent of Rio Tinto's profit in 2011.
BHP profit may fall to $18.5 billion in the year ended June 30 from $23.6 billion a year ago, a Bloomberg survey of 20 analysts showed. Its shares may gain 44 percent to AU$44.19 in 12 months, 13 out of 18 analysts surveyed by Bloomberg said. Iron ore accounted for 41 percent of BHP's operating income in the year ended June 30, 2011.
Steel Plants
A manufacturing gauge on June 1 grew at the weakest pace since December, increasing the odds China will boost stimulus. China's non-manufacturing industries expanded at the slowest pace in more than a year, as export orders declined and weakness in real estate countered strength in retailing and leasing, an official survey indicated on June 4.
Baosteel Group, China's third-biggest mill by output, and Wuhan Iron, the fourth-largest, won approval to build $21 billion of new plants five days after Premier Wen Jiabao said on May 20 he seeks to boost growth.
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