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Facts have proved that the fear of the collapse of Chinese demand so far is too exaggerated. China's iron ore imports increased by 8.1% in the first five months of this year, and crude steel output increased by 8.5%. The continued growth of residential real estate investment plays an extremely important role in the demand for iron ore in China. According to McKinsey estimates, housing construction uses 17.5% of China's steel consumption. In the first five months of this year, real estate investment increased by 37.8% year-on-year, still at a relatively high level.
Real estate investment will slow down due to continued government regulation and weak housing sales. Although the empty ghost town ignited the imagination of the bearish Chinese, the reality is that in the long run, the living conditions in mainland China are still insufficient. Macquarie's steel analysts estimate that the average housing area of ​​urban residents in 2010 will be 26 square meters, and will increase to 36 square meters equivalent to Taiwan in 2020.
Even so, the pre-crisis boom year is unlikely to reappear. Ghost towns do not necessarily indicate the end of China's construction boom, but it does mean that some housing needs have been met through past construction activities. Ai Jiarui, a partner in the steel industry at McKinsey, said that the growth in demand for steel in China's residential real estate sector will fall from a compound annual growth rate of 9.4% from 2005 to 2010 to 4% to 5% from 2010 to 2015.
Other drivers of steel demand are also likely to slow growth. Public infrastructure construction After two years of crazy and stimulating investment, its steel demand has been slowing down. Demand in the automotive industry is expected to remain strong, but the shipbuilding industry is facing overcapacity.
The iron ore mining business still has a very high profit. To move a ton of iron ore to an Australian ship, Rio Tinto and BHP Billiton cost $30. To the Chinese port, the same amount of iron ore is worth $175. Deutsche Bank mining analyst Yang Ge said that there will be a time lag in shipping more iron ore to the destination, so the supply response to demand will be limited in the next 18 months. If miners want to win in the next five years, they will have to take advantage of today's lucrative profits to prepare for the decline in Chinese demand.
Although China's iron ore demand will not fall immediately, its prospect of weaker growth means that Vale, BHP Billiton and Rio Tinto will be prepared for more difficult days in the future.