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China's steel output expected to peak in next decade


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China's steel output expected to peak in next decade

While many Chinese steel majors, including Baoshan Iron & Steel Co. Ltd.'s general manager Dai Zhihao, are lowering their respective forecasts for China's production and consumption of crude steel, Paul Butterworth, research manager at the CRU International, expects China's crude steel output to peak in the next decade on the back of the country's approaching replacements of old buildings.

"China's crude steel production has begun to fall from very high levels in 2014 but we believe that it would be relatively flat in the next five years and peak in the next decade," Butterworth told delegates at the China Mining 2016 conference in Tianjin, China, on Sept. 21, noting that the peak is likely to come in 2027 or 2028.

"The peak is largely associated with replacements of old buildings in China," he said, adding that around 40% of buildings in China were built before 2000.

But the peak in steel output does not necessarily result in an increase in demand for iron ore. Butterworth said that large amounts of scrap steel will be generated in China in coming years, which will add pressure to China's demand for iron ore.

"Scrap generation is typically related to steel consumption 20 or 25 years previously. We are going to see the steel get back to the system [in China] in the next decade, from around 2025 onwards."

"We expect the recycling rate to be around 30% so scrap available in China is going to increase significantly," Butterworth said.

While taking a bullish position in the industry over the long term, Butterworth expects that the current mini-cycle in steel industry, which started with a steel price rally in late 2015, will end in the second half or early 2017.

"China's demand improvement in steel sector was driven by an increase in social financing in late 2015," he said. "However, credit and the real estate sector [in China] have started to drop off so our view is that demand for steel and iron ore and steel will start to fall as well."

Butterworth added that low-cost, new iron ore supply entering the market will also add downward pressure on both iron ore and steel prices.