Rio Tinto's steel production forecast unlikely to happen, says China's top steel man

Despite the decreasing steel demand in China, Australia's Rio Tinto remains optimistic that China's steel output will reach one billion tonnes by 2030. A steel industry forecaster in China, however, thinks the mining company is mistaken.

Rio Tinto Chief Executive Sam Walsh told investors on its first-half results that the mining company is holding onto its internal forecast despite growth moderating in the past 18 months.

"[Our economics department] have done quite a bit of research and analysis and they feel confident that that one billion-tonne figure will continue to hold," Walsh said . "To achieve one billion tonnes of crude steel production by 2030, that's one percent growth a year. I think we'll be all right there."

But reality paints a different picture. Domestic steel consumption in China has dropped by four percent over the first half of 2015, with overall steel output tracking at just more than 820 million tonnes a year. The country is also shipping more steel into the world markets, with overseas sales surging 9.5 percent to 9.73 million metric tonnes in July, the highest level in six months. Exports expanded 27 percent to 62.13 million tonnes in the first seven months due to lower Chinese demand for steel.

According to Li Xinchuang , the Chinese government's top steel industry forecaster, the current figures show that Rio Tinto's claims do not hold water.

"You are seeing demand decline gradually, so it simply cannot reach that one billion-tonne level which Rio is talking about," he said. "I do not understand why Rio is so confident about reaching that level because we are not seeing that level of optimism here on the ground in China."

Many steel mills in China are losing money. China's steel association reported last month that 43 percent of its members lost money in the first half of the year, while the sector as a whole is struggling with plummeting demand and local prices at 20-year lows. As a result, steel is being pushed out to international markets, further lowering the prices.

"It's because of weakness in domestic steel demand , which has led mills to push their excess out into the international market. That's something which is now going to change," Ivan Szpakowski, commodities strategist at Citigroup, said. The slump may eventually push Chinese producers to cut back on production and exports.

Global steelmakers are also battling lower earnings. Asian producers Nippon Steel and Sumimoto Metal Corp. forecast the first drop in full-year earnings in three years last month, while US Steel Corp. posted a quarterly loss. South Korea's Posco also reported a profit decline and announced plans to cut jobs and refocus on its main business. Even Rio Tinto posted sharply lower first half profits and pledged US$1 billion [AU$1.36 billion] in cost cuts for the remainder of the year.

Miners have been among the worst performers on London's FTSE index of blue chip companies this year, hit by oversupply and slowing growth in China, the world's major consumer of metals. But in spite of this, smaller mining companies like Amur Minerals (London AIM: AMC) provide a glimmer of hope for the industry with its share prices rising fivefold this year — one of the few mining companies that did so at such a volatile time in the metals market.

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