Structural reform too So far, we have talked about the short-term risk to iron ore’s demand and prices – on the rise of Simandou, a seasonal downswing, and China’s government-imposed steel production cap. However, we forecast a longer-term ‘winter’ for this bulk commodity trade too. China’s steel industry is reporting a maturing of the build-out of its steel intensive sectors – property and infrastructure. Both have been growing steadily for over 20 years, essentially the core of China’s extraordinary materials-intensive ‘Super Cycle’. Now thoroughly built out, these sectors are transitioning from a ‘build’ phase to a less commodity-intensive ‘replacement’ one. It’s a structural shift that is also reflected in the collapse of property and infrastructure industry activity signals, and the peaking of China’s intensity of steel-use (Fig 4). History shows that when large, steel-intensive economies mature (local demand moderates; steel-bearing exports no longer competitive, etc.), their local steel industry quickly deteriorate (rising operating/labour costs; falling efficiency, etc.; US, Europe; Japan). China moved quickly to avoid this sort of industry decline. Reforms of the last decade have rationalised excess capacity, enforced asset and corporate consolidations, directed investment in electric-arc furnaces to diversify away from blast furnaces, developed scrap collecting/distributing facilities, etc. China’s steel industry may shrink, as steel demand slows, but the industry will evolve in an orderly, government-controlled manner. Iron ore independence But why does China’s
Fig 3
Fig 4
longer-term supply options, and probably control input costs. Again, at 120 mtpa by 2028, Simandou will be delivering >55% of Africa’s total ore exports, 8% of total seaborne supply. This low-cost, high-quality, China-backed iron ore operation will enter the global trade very low on its industry cost curve (short-term supply curve; at 1st-2nd quartiles), effectively crowding out higher cost mining operations worldwide, pulling prices even lower. Wintery outlook, explained On any forecast timeframe, it is difficult to build a bull case for the iron ore trade. In coming months, this bulk commodity trade will be subjected to a seasonal downswing; government- led, surplus-clearing steel production controls in China; and, the first
government proactively regulate national steel production capacity, while pushing ahead
China’s steel industry is reporting a maturing of the build-out of its steel intensive sectors – property and infrastructure.
with the world’s largest iron ore mining operation of Simandou? For some investors, this looks like policy conflict. For China, it is the prudent management of its 1Btpa worldwide, vertically-integrated supply chain of iron-units.
deliveries from the massive China-controlled Simandou operation. Longer-term, China’s steel demand is expected to shrink – now that it’s steel-intensive sectors are built. China’s government has long-been preparing its steel industry for the inevitable pullback in the economy’s ‘steel- intensity’ – with a series of structural reforms – to ensure that China’s mills remain efficient and profitable. Investments are also being made abroad, not only to secure the vast supply-chain that supports China’s steel mills, but to reduce the overall cost of this flow. How can investors make money in the iron ore trade, with an outlook like this? We’d recommend shortening the investment horizon to 6-12mths, to exploit on-going inconsistencies in the trade’s seasonal kicks. We would avoid a long- term buy/hold strategy for iron ore exposure, at least until China’s new, lower ore-consumption rate is established and understood. n
Yes, China’s steel demand may be peaking, but this commodity will continue to be a critical input for China’s economy for decades to come. So, China needs to somehow secure the raw materials for its evolving steel industry. Right now, it is 90% self-sufficient for metallurgical coal, but only 15% self-sufficient for iron ore. China is heavily dependent on imported ore (takes >70% of seaborne’s total supply). While Australia and Brazil have been reliable sources of imported ore since the early 2000s, given China’s US$12bn Simandou iron ore project – it clearly seeks to diversify its
NOVEMBER2025 | www.modernminingmagazine.co.za MODERN MINING 11
Made with FlippingBook - Online magazine maker