By Terry Wooten
Of Kitco News,
10 March 2010, 9:00 a.m.

Toronto—China has changed the playing field in the iron ore sector, sucking in seaborne supplies like a giant vacuum to fuel an economy that will produce more steel in the 15 years from the turn of the century than was manufactured by the entire world from 1860 to 2000, according to an executive of a London-based consultancy.

China’s frenzy for iron ore to forge the steel is driven by the exodus of its citizens from the countryside to the cities in search of a better life and the populace’s growing expectation of consumer goods in a western style, according to Phil Newman, chief operating officer of CRU Strategies. CRU is an independent business analysis and consultancy group focused on the mining, metals, power, cables, fertilizer and chemical sectors.

In an interview with Kitco News on the sidelines of PDAC2010 here, Newman said China’s obsession with gobbling up seaborne iron ore from Australia and Brazil and other producers stems from the changing social patterns. Iron ore is needed to make steel for automobiles, for housing and commercial structures, and for highways, bridges and railroads, he said. Although China is the world’s largest iron ore producer, the grade is low, necessitating the imports.

To illustrate the scale of China’s appetite, Newman said that from the origins of modern steel production in 1860 to 2000, the output grew from zero to 665 million tonnes annually. In the 15 years from 2000 up to 2015, China will repeat that, he said. “In 15 years they are going to increase their steel production by the amount the whole world has done in the previous 140.”

Although China’s iron ore needs have been increasing the past 10 years, the growth has been more evident as the recession in the U.S and other western countries lowered prices and caused many Chinese mines to halt or lower production. Newman said during 2008 the Chinese were looking everywhere for iron ore and continued to do so in 2009.

As for the outlook for the next few years, Newman said one good measure is the steel consumption per capita. “That per capita consumption has risen in China and has risen fast,” he said. In 2007 it was about 300 kilograms per person, increasing to 470 kilograms per person in 2009. The figure should flatten to about 550 kilograms during the next three to four years, he said, as urbanization slows and the economy becomes more service-oriented. “There’s quite a lot of steel yet to come on,” he said.

China’s economic growth has been phenomenal during the last decade, raising fears that there could be a bursting bubble on the horizon. Newman said the developed world countries probably have underestimated the ability of the Chinese government to manage their own economy,

“I think we have to rely on the Chinese government to keep things moving along,” he said, emphasizing that the officials have been astute at speeding up when necessary and slowing down when things get too fast. They have done a good job of keeping GDP growth between 8 and 9 percent, he said.

Even though China remains a totalitarian government, their leaders will keep their ear to the ground, according to Newman. “The Chinese have seen what others in the world have and the y want it and they want it now,” he said. “The government knows that if things do go wrong, the Chinese people will tell them they are not happy.”

China has, however, become such an economic presence in the world that concerns over their future growth are warranted.

“We don’t want their economy to overheat,” he said. “If those guys have a financial crisis anywhere near like the one we’ve had … it will make what we’ve been through the last 18 months look like a tea party.”

By Terry Wooten of Kitco News