WA premier gives conservative forecast on steel production

Western Australia’s premier Colin Barnett has predicted that Chinese steel production will peak at between 800-900 million tonnes annually – a much more conservative estimate than the one given by mining giant Rio Tinto (ASX: RIO).

Whilst Rio Tinto had previously estimated that production would hit 1 billion tonnes annually by 2030, Barnett believes that it will begin to taper off “towards the end of this decade” – an opinion that is shared by a number of analysts who believe that China’s demand for iron ore will begin to fall as it moves away from infrastructure and property as the key drivers of growth.

This would come as bad news for iron ore miners, including Rio Tinto, BHP Billiton (ASX: BHP), Fortescue Metals Group (ASX: FMG) and Arrium (ASX: ARI) which have all committed to increasing their level of annual supplies. As reported by The Australian Financial Review, the additional supplies are likely to tip the market into surplus by around 2016.

Encouragingly however, Macquarie has upgraded its long-term price expectations for the commodity. After having maintained a long-term price of US$80 per tonne, analyst Graeme Train stated “We conclude iron ore prices will remain above US$115 a tonne over the next two years.”

Although it is expected to drop in value in the coming weeks, the price tag on iron ore is currently around US$133 per tonne – roughly 16% below its 12-month high of US$158.90 a tonne recorded in February. Miners have been forced to cut their production costs in order to ensure long-term sustainability on their projects.

Foolish takeaway

Shares in the miners have remained quite resilient in recent times as the price of iron ore has been unseasonably high. At today’s prices, the miners do not present as attractive buying opportunities, given the volatility facing the sector. Until the shares drop further in price, it would be much wiser to add them to your watchlist and explore other investment options.

For instance, you could discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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