Fitch Ratings forecasts that after a period of severe destocking in 2012,raw steel production in China will grow 3%to 4%in 2013.But the ratings agency also believes that Chinese steel demand has likely peaked and should grow at less than 5%a year going forward.
Fitch said that demand for iron ore in the world's most populous nation sets the price for iron ore.China represents more than 60%of the global demand for seaborne iron ore as it produces almost 50%of the world's steel.
It said that in September,spot iron ore prices were USD 87 per tonne,a three year low,Fitch says in its 2013 Outlook for Steel Raw Materials.Prices later rebounded to USD 120 per tonne,but were still down 22%from 2012's highs.
Fitch added that weak pricing in China resulted in about 40%of domestic iron ore mines suspending production over the summer.
The ratings agency said that a significant amount of the iron ore projects that the United Nations Conference on Trade and Development says are expected to come on stream between 2012 and 2014 are also likely to be delayed.
Fitch said that at the same time,producers of seaborne iron ore in Australia,Brazil and Africa are expanding low cost production that will result in excess capacity.Cumulative capacity increases beginning in 2012 through 2015 are estimated at 377 million tonnes.And roughly half of the new iron ore production during that timeframe will come from Australian project.
It said that India may become a net importer of iron ore during its next fiscal year.A mining ban was in place from August 2011 until April 2012 in the state of Karnataka,while illegal mines in the state of Orissa were forced to shut down.There was also a recent ban on mining in Goa.Fitch points out that before the bans,Goa and Karnataka together accounted for about 65%of the country's iron ore exports.
The ratings agency added that producers of seaborne iron ore with medium costs should earn EBITDA margins of roughly 35%on average over the next two years.
Fitch further added that"Iron ore production will be managed to just meet demand through 2013,with potential for modest excess supply from new builds beginning in 2014."
