China's steel appetite set to wane Growth in demand for steel in China, the world's biggest consumer, is set to slow this year as a cooling real estate sector damps appetite for the crucial industrial metal, say analysts and industry experts. China's demand for steel has soared over the past decade, with annual growth averaging 15 per cent, building the country into a powerhouse that now accounts for more than 40 per cent of global steel production. But last year steel demand growth slowed to 8 per cent and this year it could slow to 4 per cent, according to the China Iron and Steel Association, an industry body representing big mills. "We are seeing a change of China's growth paradigm" as the top leaders shift toward greener development, says Nicholas Zhu, macro-commodity analyst at ANZ. Beijing this week lowered its economic growth target rate to 7.5 per cent, below 8 per cent for the first time since 2004. Chinese steel demand is critical for the price of iron ore, the biggest commodity earner for miners such as Vale of Brazil, Rio Tinto and BHP Billiton. China is the world's biggest consumer of iron ore, accounting for 60 per cent of global trade last year. The fluctuations in Chinese iron ore consumption spread beyond its borders, affecting the profitability of top steelmakers including ArcelorMittal, Nippon Steel and ThyssenKrupp. Steel executives initially thought that the slowdown was seasonal due to the Chinese New Year lull, but demand for the commodity has yet to recover weeks after the end of the festivities. China's steel mills are producing roughly 1.7m tonnes per day, down from record highs above 2m tonnes at the end of June, according to CISA data. Steel prices in China softened during the first two months of this year but prices for certain products have shown a mild recovery since the beginning of March. Prices for rebar, a type of steel used in construction, bottomed in the third week of February and rose 1.2 per cent the first week of March to Rmb4250 ($673) per tonne, according to CISA indices. The drop in steel production has hit iron ore and coking coal, the two main steelmaking commodities. Inventories of iron ore are near historic highs and some Chinese ports are so full they have stopped accepting cargoes because they have no storage capacity, according to a senior mining executive. CISA data show steel inventories peaked at a record high of 19m tonnes in February. Yet iron ore prices have surprised traders, creeping up in spite of weak steel production. The benchmark spot ore with a 62 per cent content of iron on Wednesday stood at $143 a tonne, up from a low point of $134 a tone earlier this year. Iron ore traders attribute that to tight supplies from India, but steel mill executives suspect price manipulation as traders try to keep prices high while selling down stockpiles. With supplies tight, most analysts expect iron ore prices to rise even more by the end of the year. But in the meantime, "iron ore prices will definitely fall," says one trader in Tianjin, an important trading city. Demand will not be that great the first half of this year, although it may improve the second half. "Steel mills are trying to keep iron ore inventories low at the moment, because they aren't optimistic about the future," says a steel executive in southern China. Steel mills and traders say they expect steel demand to pick up through March as construction activity in China slowly resumes but add that, when it does re-emerge, demand will grow more slowly than before. A key reason for the lower steel demand is the softening in China's real estate sector, which is one of the biggest single drivers of global demand for raw materials and accounts for just over half of China's steel demand. Construction activity has been falling steadily since Beijing last year unveiled controls aimed at curbing a bubble in the property sector. China has begun to loosen monetary policy but that has yet to trickle down to the real economy. For the steel industry, the focus is on when Beijing will start relaxing the property restrictions. Last year, new starts for construction slowed every month through December, the latest month for which data are available. Given this environment, several of China's steel mills have issued profit warnings and some are seeking new markets abroad to bolster exports. "It is not likely that the country will have big economic stimulus measures this year like they did in 2008, so steel supply will outstrip demand in 2012 for the whole year," said Su Jiangang, head of Maanshan Iron and Steel, China's ninth-largest steel group by production, in a recent interview with China Business News. The longer-term picture is brighter, however. While double-digit growth rates are unlikely to return, China's economic growth, steady urbanisation and growing housing needs will keep a floor under demand in coming years, analysts say.