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Australia Metals Report Q3 2009Product Type: Market Research ReportPublished by: Business Monitor International Published: July 2009 Product Code: R302-7051 Description Australian metals producers see little hope of an early turnaround in either domestic or export demand,with crude steel output down 53.9% year-on-year (y-o-y) to 1.24mn tonnes in the first four months of theyear, according to BMI’s latest Australia Metals Report. Somel executives had stated that the exportmarket had reached its nadir by end-February as spot prices for iron ore and scrap showed signs of rising,but their hopes have been dashed.The fortunes of the Australian metallurgical industry are likely to be highly influenced by Asia’s largestconsumer, China, where investment is rising largely as a result of a massive government fiscal stimuluspackage. However, broad-based economic growth in China is proving elusive with primary industrialgrowth at just 3.5% in Q109. The situation does not bode well for Australian steel and aluminiumproducers, with BMI expecting the rate of decline in Chinese metals import demand to hasten. Australianexporters will seek to diversify markets and the Chinese downturn could provide new opportunities,particularly in Southeast Asia. With Chinese production likely to be more domestically-oriented over theshort to medium term and its export tax on steel longs set to remain at 25%, China’s share of the billetmarket is expected to drop, giving Australian producers the chance to exploit the situation. Nevertheless,BMI believes the poor performance in China and other Asian markets will lead to a 22% drop in steelexports to 1.14mn tonnes. Combined with the deterioration in domestic demand, steel output is forecast todrop by 25.5% to 5.72mn tonnes in 2009. Based on these uncertainties and continuing lacklustre performance in the domestic market, BMI does notbelieve that steel output will fully recover to the 2007 peak within the next five years. By 2013, outputshould reach 7.42mn tonnes, which is 2.8% down on 2008. However, a projected improvement in steelprices should see production in value terms reaching US$6.62bn, an increase of 0.9% over 2008. Growthshould be stimulated by exports as the Chinese market revives. BMI believes exports will reach 1.66mntonnes by 2013, an increase of 13.7% over 2008. A poor market environment has exacerbated the debt problems of Anglo-Australian mining and metalsgiant Rio Tinto, which has signed a controversial with Chinese state-owned Chinalco to raise US$19.5bnin investment. Rio Tinto planned to use the cash from the deal, which needs shareholder and regulatoryapproval, to pay off some of its US$38bn debt and to expand in China and elsewhere. Chinalco agreed topay US$12.3bn for stakes in Rio’s key iron ore, copper and aluminium assets and US$7.2bn that couldpotentially double its equity stake in Rio to 18%. In May 2009, Rio Tinto received approval from USregulators for a US$7.2bn convertible bonds issue and the sale to Chinalco of a minority stake inKennecott Utah Copper Corporation. In March 2009, the Australian Competition and ConsumerCommission also gave its go-ahead for the deal. Despite the approval, there is strong shareholderopposition to any sale of assets to Chinalco, and desire exists to seek a US$7.6bn rights issue. Althoughthe deal is still subject to regulatory and shareholder approval - which is by no means guaranteed - it hasraised important questions about the financial health of Australia’s resource extraction sector. Concernshave been raised that Chinalco would use its influence to push down the price of iron ore being shipped toChina’s steel mills, to the detriment of Rio’s shareholders. However, with an upward movement in metalsprices in Q209, the idea of a rights offering without Chinalco involvement is becoming more attractive. Table of Contents
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