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By Melissa Pistilli - Exclusive to Iron Investing News

The China Iron & Steel Association ^[2]'s monthly report for July shows that domestic steel demand is wilting in the scorching summer heat, heavy rainfall in the South and the recently-concluded Olympic Games.

Increasing amounts of steel inventory has weakened iron ore demand causing the price of iron to slide. As of last week, 73.42 million tonnes of imported iron has piled up at major seaports, according to a Mysteel survey ^[3], resulting from steel mill production cutbacks.

Many analysts believe the recent drop in the Chinese steel market is indicative of slowing economic growth and the end of the commodities boom, which could spell trouble for raw material companies like Rio Tinto. However, Rio, the world's second-largest mining group, is confident that the Chinese economy will pick up after the "Olympic hangover" wears off.  "We do not see a country-wide slowdown and expect the Chinese economy to pick up post-Olympics," says Rio Tinto's CEO Tom Albanese ^[4].

Rio's future is tied to economic growth in countries like China and India. The company's revenue from China ^[5] in the first half of this year has reached US$4.9 billion up from US$2.4 billion last year. Rio believes North America and Europe are quickly becoming insignificant in determining metals prices. Chinese iron ore imports are up 20 per cent from last year. Despite weakening economies in the West, Rio was able to lift iron prices an average of 86 per cent compared with last year based on demand from China, India, and other emerging economies.

Rio expects China to recover the growth trajectory it has lost after a "self-imposed slowdown during the Olympics." During the lead up to the Olympics, the Chinese government closed down large industries around Beijing and its neighbouring cities because of pollution concerns.

Albanese concedes China will experience a drop in demand for its exports in the West. However, he emphasizes that the crucial determinant of continued growth in China is domestic consumption. The company sees the fastest areas of growth in China moving from Beijing, Tianjin and Shanghai to the inland provinces. "There are provinces with populations larger than most European countries that are only now beginning to see rapid development," says Albanese.

As proof of China's expected rebound, Rio cites research from management consultancy McKinsey ^[4] which reported that "the scale and pace of urbanization would continue at an unprecedented rate." McKinsey's report predicts that by 2025 China will have 221 cities with a million inhabitants or more. That's an impressive number when compared to all of Europe, which today has only 35. The report also forecasts 20,000 to 50,000 skycrapers, equivalent to 10 New Yorks, popping up even in less developed interior provinces.

All of this growth will require enormous spending on infrastructure and will no doubt create supported long-term demand for iron ore and other raw materials.