Another related article.
https: //stock<>head .com.au/resources/bulk-buys-bhp-lays-out-its-bull-case-for-steel-demand-in-a-greening-world/
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- BHP says cumulative steel demand in the next 30 years will double that of the last 30, arguing the commodity will be a net beneficiary of decarbonisation and climate change
- The changing environment alone could drive increase in demand equal to another South Korea
- BHP is preparing to lift its iron ore output from 290Mtpa to 330Mtpa long term
It has become common place to assume the long term outlook for iron ore and coal is threatened by the energy transition, global warming and the push to decarbonise the world’s energy and industrial needs.
While the positive and potentially scary demand outlook for lithium, copper, nickel and other ‘future facing commodities’ is well established, there have been larger question marks over the steel market, and in particular dominant producer China’s desire to curb its production levels to meet environmental goals.
BHP (ASX:BHP)begs to differ, telling analysts at an investor trip to its vast WA Iron Ore business in the Pilbara that demand for steel will actually be higher in a scenario where global warming is limited to 1.5 degrees Celsius above pre-industrial levels.
BHP is talking its own book here, describing decarbonisation as a “giga-trend” that encompasses, unsurprisingly, the collection of commodities BHP produces, including iron ore, nickel and copper.
But it is worthwhile to take BHP’s chief economist Huw McKay’s analysis on board.
“The decarbonisation of power and the electrification of transport are megatrends in their own right, but they ‘report’ to the wider societal objective,” he said.
“The link between the end-use of mining products and decarbonisation is usually raised in the context of critical minerals like copper and nickel.
“Less well understood is the fact that the demand for steel is also generally higher under Paris-aligned scenarios than in cases associated with higher degrees of global warming.
“For example, in BHP’s 1.5 degree scenario, the demand for steel is indeed slightly higher than under the base case.
“In broad brush strokes, our base case sees the growth in annual steel demand essentially keeping pace with population growth out to 2050: a CAGR of roughly three-quarters of a percentage point.”
30 by 30
Cumulative demand over the next 30 years is expected to double compared to the previous 30, McKay says.
While Chinese steel production has plateaued at between 1-1.1Bt after two decades of near unceasing growth, Indian steel production is expected to lift four-fold from 100Mt to 400Mt by 2050 and South West Asian demand will triple from 110Mt, the world’s biggest miner contests.
While scrap stocks will grow, with China expected to hit a 50-50 scrap to steel ratio by 2050, BHP says finished steel demand will lift 2% and 4% respectively out to 2030 and 2050, with decarbonisation making steel a net beneficiary of the changing global environment.
Climate change itself will increase wear and tear on equipment and infrastructure leading to a higher capital stock turnover which will increase demand alone by 73Mt, equivalent to another South Korea.
Then there is the additional infrastructure needed to underpin the shift from coal and gas power to wind, solar, hydro, and nuclear.
“Power generation currently provides less than 2% of global steel demand,” McKay said.
“That is expected to triple by 2050, noting every percentage point increase in share in that year will equate to between 20 and 25 Mt – depending upon what you assume for other sectors.
“The decarbonisation of power will be dominated by onshore wind and solar PV, with complementary roles to be played by offshore wind, hydro and nuclear energy.”
McKay says offshore wind requires 190t of steel per MW, onshore 124t, hydro 161t and solar 45t.
“But the sheer scale of the projected solar buildout makes it the second largest contributor to the overall uplift in steel demand from power generation, behind only onshore wind,” he said.
“Looking solely at steel demand from the wind and solar segment, it is expected to increase five-fold from today to 2050.”
Iron ore demand “resilient”
The end has been called for iron ore numerous times, but McKay says it has remained resilient in recent years, with contestable demand from 2018 to 2021 125Mt higher than expected according to BHP.
“Major seaborne producers have collectively exported 79 Mt less than expected,” McKay said.“And rather than being squeezed out, higher cost producers (China domestic and junior seaborne operators) have increased production by 183 Mt.
“And you don’t need me to tell you what has happened to price. We hit a new record in 2021, and cost support is currently sitting in the $80-100 range in 62% CFR terms.
“The price has bounced off this level more than once since Chinese steel curbs were introduced a little over a year ago, which is an important buttress to the desktop view of where real-time cost support might lie.
“We also note that raw tonnages do not tell the full story on supply.”
BHP’s flight to 330
BHP’s confidence in the outlook for iron ore seems to underpin its plans to increase its scaled from 300Mtpa to 330Mtpa over time, bringing its unit costs down from US$18-19/t to under US$17/t.
WAIO boss Brendan Craig said the miner would be able to hit a run rate of 300Mtpa in the medium term with debottlenecking activities at a capital intensity of US$45-60/t, largely around the port and along with the full ramp up of the 80Mtpa South Flank mine.
It is looking into plans to develop a number of orebodies near the central Yandi hub, as well as around the Newman hub, to support the expansion, and it focusing in on grade to improve the quality of its product mix amid decarbonisation imperatives for both BHP and its customers.
“Whether we have the ability to beneficiate ore to improve grade is an important consideration and we know that quality will be key in the future as steel mills look to decarbonise,” Craig said.
BHP achieved a price realisation of around 98.5% against the 62% Fe benchmark index in FY22, higher than competitors Rio and FMG.
While its grade profile is around 61%, well below levels required for low emissions steelmaking tech like direct reduced iron, BHP says at just under 30 per cent it does have the highest proportion of lump in the industry, something that could hit 33% once South Flank is ramped up.
Lump does not require sintering, reducing emissions in the blast furnace compared to fines and drawing a premium from steelmakers.
Analysts have called BHP’s ramp up plans “relatively modest”, with the company giving itself three years to hit the smaller 300Mtpa target (up 3.4% from 290Mtpa currently).
“We would expect the potential for a 330mtpa growth project should be economically attractive, do-able, and will likely reaffirm BHP’s leading position in iron ore markets,” RBC’s Tyler Broda and Kaan Peker said.
“The company is benefiting from multiple structural tailwinds and at this stage we would only to expect that these would be reinforced in the coming years into this growth.
“Our analysis suggests similar to BHP’s that we are heading towards a world where India and the rest of Asia take the growth baton from China, however we continue to remain concerned that the rebalancing away from property investment, and the very likely shift towards consumption growing as a share of GDP in China creates a very uncertain medium-term environment for steel and iron ore demand, especially with the disconnects from the property sector still pulsing through the economy (lower land sales, lower LGFV liquidity).”
Iron ore futures in Singapore were trading at US$93/t yesterday, well below record levels seen last year but more than four times the headline costs at the Pilbara iron ore majors.
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