REPEAT: MNI: China Peaking Steel Demand a Risk to RBA MonPol

Repeats Story Initially Transmitted at 10:40 GMT Sep 19/06:40 EST Sep 19

--RBA Discussion on Steel Demand Not Part of Special China Topic

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia's admission that Chinese steel

production may have reached its peak and would affect the demand and price for

its key export commodity, iron ore, could have implications for the nation's

growth prospects and monetary policy.

     In the minutes of the September 5 board meeting, published Tuesday, the RBA

discussed the influence of China on the global iron ore and steel markets more

generally.

     This was part of discussions that are held at the monthly board meetings.

There was another discussion on China at the meeting, which was a special topic

but didn't have any direct connection with the former. 

     In the special topic, the RBA discussed the challenges facing the Chinese

authorities as they balance their commitment to short-term growth targets with

their efforts to address medium-term risks arising from high and rising levels

of debt in the Chinese economy. Governor Philip Lowe has said on several

occasions that the board's consideration of special topics carries no particular

message about the short-term outlook for monetary policy as they are part of the

RBA's regular in-depth reviews of important issues.

     However, the discussion of Chinese influence on global iron ore prices may

have some implication for monetary policy, although it is more likely to be in

the medium-term rather than short-term.

     The key theme was that Chinese steel production and consumption based on

income level was likely to be close to its peak and that growth in Chinese steel

production would not add much to global demand for iron ore in the future.

     This means that in the medium term Chinese steel consumption per capita is

unlikely to rise, though in the short-term it could. 

     Already there is an expectation that iron ore prices would fall in the

period ahead because of ongoing expansion of global iron ore supply. However, if

the current strong demand for steel in China eases, it would add to the headwind

for prices.

     In August, the RBA slightly revised up its forecast for Australia's terms

of trade based on increases in iron ore and coking coal, but still expects it to

decline over the forecast period based on an increase in supply.

     The forecast suggests that terms of trade could decline still further if

demand is weaker than expected and hurts prices.

     In the policy statement, the RBA referred to uncertainty surrounding

China's growth outlook among the risks for its forecast as it would have

implications for Australian resource exports and commodity prices. 

     "If conditions in the Chinese construction and/or manufacturing sectors

ease by more (less) than expected in the next few quarters, growth in demand for

steel, and therefore iron ore and coking coal, could be lower (higher) than

expected," the RBA said.

     If terms of trade decline more than expected, other things being equal, the

RBA's already optimistic forecast for growth in the next few years may prove to

be more optimistic. Slower growth would keep inflation lower for longer.

     The RBA is hoping increasing demand from India would fill the gap caused by

slowing demand from China, but this is a longer-run scenario and there is no

certainty that India would add to global demand given it has the potential to

increase its own iron ore production.

     Even if it does, the RBA's medium-term concerns remain and until that is

resolved, or the non-mining economy makes a stronger recovery, it is unlikely

that raising the cash rate will be an option it would look to.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com