The head of Australia’s Fortescue Metals Group, the world’s fourth-largest iron ore supplier, expects Chinese steel production to keep growing despite an economic slowdown as government stimulus stokes demand.
Fortescue sees a “3% to 4% increase in crude steel production in China this year,” based on discussion with “customers and other key figures” there, CEO Elizabeth Gaines told Nikkei on Wednesday during a visit to Japan. China, which accounts for half the world’s crude steel output, churned out a record 928 million tons last year, up 10% from 2017.
In addition to the Chinese-led Belt and Road Initiative for building ports, highways and railroads across Eurasia, “the government’s focus on further infrastructure development” at home is also underpinning demand for steel, and thus for iron ore, Gaines said.
“Continued investment in infrastructure is a way to continue to stimulate the economy,” she said, noting that high-speed rail projects have been announced and new airports built.
The trade war with the U.S. that is weighing on the Chinese economy has no direct effect on China’s steel sector, according to Gaines. “Steel produced in China is consumed domestically [and] very little is exported to the U.S., but there might be some indirect impact,” she said.
Gaines also indicated that iron ore remains unscathed by the tensions between Beijing and Canberra that reportedly led to Australian coal shipments being held up in customs checks in February. China can tap its own domestic coal supply, but the country relies on imported iron ore to sustain its steelmakers, she said.
That said, the possibility of Beijing applying economic pressure through trade remains a risk for Fortescue, which generates 90% of its sales in China.
“We have been progressively looking [into] opportunities for further diversification,” Gaines said.
She noted that Fortescue has customers in Japan and South Korea and will “continue to develop those relationships.” The company also sells to Vietnam and India, which Gaines cited as growth markets alongside Indonesia.
Fortescue’s mines are located in the Pilbara region of northwestern Australia, a “great location to supply [the] broader region,” she said.
The drive to diversify has factored into Fortescue’s recent shift toward higher-grade ore containing more iron, which is in greater demand in such markets as Japan and South Korea than the low-grade iron that makes up most of the company’s output now. Chinese demand for high-grade ore also picked up last year, though it has ebbed lately as decreased profitability at steel mills spurs buyers to focus on cutting import costs.
A key part of Fortescue’s strategy is the Eliwana project, on which the company made a final investment decision last year. Eliwana is slated to ship its first load of ore in December 2020.
Fortescue aims to have ore with more than 60% iron content make up a majority of its product, said Chief Operating Officer Greg Lilleyman, who also participated in the interview.
The company looks to maintain a wide range of products so it can be “flexible and agile” to meet each customer’s needs, he said.
International iron ore prices have been trending upward since a dam burst early this year at a mine operated by Brazilian giant Vale. A recent cyclone that hit Western Australia, disrupting Rio Tinto’s iron ore production, has driven prices even higher. Gaines said the storm had a “modest impact” on Fortescue’s operations.
Given the multiple supply disruptions, prices are likely to remain elevated for the time being, Gaines said.