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BMO Capital Markets says Chinese steel demand growth is not a given in 2019


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BMO Capital Markets says Chinese steel demand growth is not a given in 2019

After another stellar year in 2018, analysts are not as confident about Chinese steel demand growth in 2019 as they have been for prior years.

BMO Capital Markets said in a Jan. 16 note that China's consumption of 600 kilograms per capita is approaching the peak levels reached by Japan and the U.S. in the past. "Steel demand in the country is now running at double the levels seen in 2007-2008, or in other words has doubled in a decade from what was already far and away the largest steel consuming economy."

The investment firm calculated real Chinese steel demand at 845 million tonnes in 2018, the highest growth rate since 2013 and a 9% increase over 2017 demand. The fourth quarter of 2018 recorded the fastest year-over-year increase for apparent steel consumption since 2010, BMO added.

Chinese steel demand has grown for the third consecutive year. However, BMO analysts are now less confident that demand will continue growing in 2019, expecting demand from the construction sector to be less of a driver for growth.

BMO said any meaningful growth in Chinese steel demand in 2019 would be "a surprise" unless there is a greater push to substitute capital goods imports, necessitating higher domestic steel production. The analysts added, "While infrastructure may be picking up, this is not a one-for-one replacement in metals intensity ... the impetus from the construction market seen over the past fifteen years is going to struggle to keep on adding incremental demand tonnes."

New steel and aluminum capacity coming online in the Association of Southeast Asian Nations, or ASEAN, in 2019 to 2020 will challenge growing Chinese exports to the countries. BMO said Chinese steel exports to ASEAN had stabilized around 60 million tonnes per annum, while aluminum exports continued rising.

BMO also sees 2018 as a good year for copper in China. Real copper demand increased 4.2% year over year in the country, compared with 2.8% in 2017. The growth shows that China added about 500,000 tonnes of copper demand over the year due to the one-off from cathode replacing scrap following the category-seven import restrictions. Looking ahead, BMO expects little growth in copper concentrate available to China in 2019 due to the lack of supply growth.

Elsewhere, South32 Ltd. came into the spotlight recently due to its strong fiscal second-quarter production numbers. Metallurgical coal production at its Illawarra project recorded a 86% year over year growth.

BMO believes that the company is well-positioned for a strong 2019, although its production growth is likely to be offset by weaker-than-expected prices received. It remained an outperform rating for the diversified miner and set a target price of 210 pence per share, compared with the company's Jan. 16 closing price of 186 pence.

Sanford C. Bernstein analysts maintained a market-perform rating for the company, but their target price on the stock represents a potential downside of 9% relative to the Jan. 16 closing price. The analysts said risks to South32's performance include continued weakness in manganese and aluminum prices, flagging that any growth coming from M&A in copper or iron ore would represent "a pure transfer of value away from [company] shareholders."