Chinese steel industry keeps mining investors in the money

Rio Tinto CEO Jakob StausholmFurther evidence of just how successfully China has recovered from the effects of the COVID-19 pandemic emerged today as demand from the Chinese steel industry prompted both Rio Tinto and BHP to declare record dividend pay-outs. At a presentation in Perth, newly-appointed CEO Jakob Stausholm surprised Rio Tinto shareholders by announcing he was handing them back $9bn in cash, including a final dividend of $6.5bn, the biggest dividend in the Anglo-American mining multinational’s 148-year history. BHP declared its own largest-ever interim dividend as profits from its operating business soared by 17% to $9.8bn

Both companies owe this upturn in their fortunes to an increase in demand from the Chinese steel industry. China’s crude steel output increased by 5.2% last year to reach a record 1.053bn tonnes, which was in turn triggered by a quick recovery in construction and manufacturing demand after successive lockdowns.

At 1.9%, the growth of China’s construction industry was relatively modest last year. This is expected to pick up to an average annual growth of 4.7% over the next three years, driven by investment in new infrastructure projects in areas such as 5G networks, Artificial Intelligence, the Internet of Things and data centres as well as in transport, renewable energy and residential infrastructure initiatives. According to the China Electronic Information Industry Development (CCID), a government-backed think tank, China is expected to spend $1.4 trillion on new infrastructure projects between 2020-2025. And that will call for a lot of Chinese steel.

Tom Price Iron Ore mine AustraliaWhile domestic demand is the main driver behind China’s construction industry, the picture for its manufacturing industry is altogether more international. According to data collated by the United National Statistical Division, China is responsible for $4trn (more than 28%) of the world’s manufacturing output and almost double that of the US.

Concerned about deteriorating trade relations with the US and Australia, Beijing’s latest Five Year Plan calls on the Chinese steel industry to reduce its dependency on seaborne iron ore imports – ie those extracted from BHP’s and Rio Tinto’s Australian mines – but that may be easier said than done. Although it has the fourth largest iron ore reserves in the world after Australia, Brazil and Russia the iron ore in China’s domestic mines is relatively poor in quality. BHP and Rio Tinto shareholders could¬† be in a for a few more windfall years yet.