Abstract
Australian metals producers see little hope of an early turnaround in either
domestic or export demand,
with crude steel output down 53.9% year-on-year
(y-o-y) to 1.24mn tonnes in the first four months of the
year, according
to BMI’s latest Australia Metals Report. Somel executives had stated
that the export
market had reached its nadir by end-February as spot
prices for iron ore and scrap showed signs of rising,
but their hopes have
been dashed.
The fortunes of the Australian metallurgical industry are
likely to be highly influenced by Asia’s largest
consumer, China,
where investment is rising largely as a result of a massive government fiscal
stimulus
package. However, broad-based economic growth in China is proving
elusive with primary industrial
growth at just 3.5% in Q109. The situation
does not bode well for Australian steel and aluminium
producers, with BMI
expecting the rate of decline in Chinese metals import demand to hasten.
Australian
exporters will seek to diversify markets and the Chinese
downturn could provide new opportunities,
particularly in Southeast Asia.
With Chinese production likely to be more domestically-oriented over the
short to medium term and its export tax on steel longs set to remain at 25%,
China’s share of the billet
market is expected to drop, giving
Australian producers the chance to exploit the situation. Nevertheless,
BMI believes the poor performance in China and other Asian markets will lead
to a 22% drop in steel
exports to 1.14mn tonnes. Combined with the
deterioration in domestic demand, steel output is forecast to
drop by
25.5% to 5.72mn tonnes in 2009.
Based on these uncertainties and
continuing lacklustre performance in the domestic market, BMI does not
believe that steel output will fully recover to the 2007 peak within the next
five years. By 2013, output
should reach 7.42mn tonnes, which is 2.8% down
on 2008. However, a projected improvement in steel
prices should see
production in value terms reaching US$6.62bn, an increase of 0.9% over 2008.
Growth
should be stimulated by exports as the Chinese market revives. BMI
believes exports will reach 1.66mn
tonnes by 2013, an increase of 13.7%
over 2008.
A poor market environment has exacerbated the debt problems of
Anglo-Australian mining and metals
giant Rio Tinto, which has signed a
controversial with Chinese state-owned Chinalco to raise US$19.5bn
in
investment. Rio Tinto planned to use the cash from the deal, which needs
shareholder and regulatory
approval, to pay off some of its US$38bn debt
and to expand in China and elsewhere. Chinalco agreed to
pay US$12.3bn for
stakes in Rio’s key iron ore, copper and aluminium assets and US$7.2bn
that could
potentially double its equity stake in Rio to 18%. In May 2009,
Rio Tinto received approval from US
regulators for a US$7.2bn convertible
bonds issue and the sale to Chinalco of a minority stake in
Kennecott Utah
Copper Corporation. In March 2009, the Australian Competition and Consumer
Commission also gave its go-ahead for the deal. Despite the approval, there is
strong shareholder
opposition to any sale of assets to Chinalco, and
desire exists to seek a US$7.6bn rights issue. Although
the deal is still
subject to regulatory and shareholder approval – which is by no means
guaranteed – it has
raised important questions about the financial
health of Australia’s resource extraction sector. Concerns
have been
raised that Chinalco would use its influence to push down the price of iron
ore being shipped to
China’s steel mills, to the detriment of
Rio’s shareholders. However, with an upward movement in metals
prices in Q209, the idea of a rights offering without Chinalco involvement is
becoming more attractive.
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