Fitch: Stockpiling Won't Halt Chinese Demand for Australian Ore

Wed, 19 Mar - 8:01am
(The following statement was released by the rating agency)

SYDNEY/HONG KONG, March 18 (Fitch) The fundamentals underpinning China's demand 
for key commodities from Australia remain unchanged, despite iron ore inventory 
at China's major ports reaching a two-year high and lower China GDP forecasts, 
according to Fitch Ratings. 

The high iron ore stockpiles of 105 million tonnes (mt) as of 7 March 2014, and 
the recent fall in the prices of key commodities, are casting negative sentiment 
on Australian exporters because China's factories are the biggest buyers of 
Australia's iron ore, copper and coking coal. We believe a combination of 
seasonal and one-off factors have clouded market conditions, and Chinese demand 
for Australian commodities is not about to decline drastically.   

Steel production fell to 2.0mt during early to mid-February, which caused the 
consumption/inventory ratio to increase to 29 days at end-February from just 
above the 27-day long-term average. We expect production to rise back towards 
the 2.1mt 2013 average - now that seasonal and one-off factors are largely over. 


The seasonal slowdown over the Lunar New Year period, together with traders 
using iron ore as collateral to profit from interest-rate differentials, has 
contributed to the inventory overhang, and fuelled the negative sentiment. The 
inventory trade uses interest-rate arbitrage swaps (IRAS) to import iron ore 
into China based on low-interest letters of credit, and then uses the iron ore 
as collateral to invest in China's high-yielding domestic markets.

The seasonal slowdown was extended this year because of severe pollution in many 
Chinese cities, and a push by steel-makers to upgrade their plants to meet 
environmental standards in the wake of a government announcement that it will 
crack down on officials neglecting environmental issues.

Notwithstanding lower forecast GDP growth of around 7% over the next two to 
three years, the higher base effect of China's economy after years of rapid 
expansion means that demand for commodities will keep rising in absolute terms; 
however, the extent of each year's incremental demand is likely to decline 
progressively. 

Specifically, China's fixed-asset investment (FAI) propels growth in the global 
resources sector, and is still far from saturation. Chinese building starts rose 
by 13.5% to 2.0 billion cubic metres in 2013, with December 2013 recording the 
highest year-on-year growth. Such strong construction supports the medium-term 
outlook for the steel sector, which bodes well for Australian iron ore 
exporters. Yet Fitch is cautious that China's incremental demand for commodities 
(including iron ore) may have peaked - and will not revisit the 2008 to 2013 
level that was fuelled by China's economic stimulus. 

China's reliance on imported iron ore actually increases when iron ore prices 
are comparatively low, since Chinese production costs are much higher due to the 
poor grade.  For example, when prices were at their lowest in 2013 during the 
May-July period, Chinese iron ore production managed only anaemic growth of 2% 
to 3% yoy; whereas iron ore imports grew by 13% yoy. This contrasts with an 
overall 10% growth in 2013 for both China's iron ore production and imports. 
Furthermore, Fitch is wary that weakening profitability at the Chinese mines 
will limit capex spending and constrain capacity expansion.

Contact:

Vicky Melbourne

Senior Director

Corporates

+61 2 8256 0325

Fitch Australia Pty Ltd

Level 15, 77 King Street

Sydney 2000

Su Aik Lim

Director

+65 6796 7233

Laura Zhai

Associate Director

+852 2263 9974

Matt Jamieson

Head of APAC Research

Corporates Ratings Group

+61 2 8256 0366

Media Relations: Iselle Gonzalez, Sydney, Tel: +61 2 8256 0326, Email: 
iselle.gonzalez@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, 
Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, 
Email: wailun.wan@fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market 
commentary page. The original article can be accessed at www.fitchratings.com. 
All opinions expressed are those of Fitch Ratings.

Applicable Criteria and Related Research: 

View Point: APAC Corporates - Compendium of Topical Commentary Published in 
November 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725355

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: 
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING 
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S 
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND 
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF 
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE 
AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF 
CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE 
SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS 
SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED 
ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH 
WEBSITE.

URN: 
urn:newsml:reuters.com:20140318:nFit693843:4
Topics: 
AU INDS CORA MINE EMRG ASIA DBT LEN RTRS AAA MIN BMAT STL MTAL CN STEE

Contact Us

Due to the security nature of our business, personal meetings are only by pre-arranged appointment.
Phone at any time on

1300 987 995

info@ausmint.com