Iron ore is an appropriate commodity to support a nation of punters. It is highly volatile, affording great riches and sudden busts that deliver the nation bounty, then immense losses.
Because iron ore and coking coal are over 50 per cent of national exports, when they rise, the economy gets a pay rise for no extra work. This boosts the economy directly via mining investment and rising wages, wealth via the stock market, and income through tax cuts as export receipts boost the national budget.
However, when it goes bust, so do all of these effects.
Thus interest rates also tend to follow the iron ore cycle up… and then down.
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Iron ore has boomed and busted no fewer than four times in the past decade. From the crash of 2015 to the Brazilian mining mega-accident of 2019, to the COVID crash and boom and crash.
Yet, look a little more closely, and these episodes illustrate only two large cycles.
The China urbanisation shock from 2003-2011 (briefly interrupted by the GFC) followed by the Chinese property bust of 2012-2016.
And the subsequent Chinese property bubble of 2017-2021, which is now turning into a bust as Beijing shifts its growth priorities.
These are all features of the same phenomenon.
First, the one-off urbanisation of China has been the single largest demand source for Chinese steel and iron ore for twenty years.
Second, this Chinese demand source has triggered two major mining investment cycles from 2008-2012 and 2019-2024 to increase supply.
The first of these two cycles cratered the iron ore to $37 in 2016.
The second has already halved iron ore from the COVID highs and will threaten 2015 prices before it is over.
‘Pilbara killer’ comes as Chinese demand hole grows
Chinese steel production has already fallen 45 million tonnes from its 2020 peak and this year, plus subsequent years, will fall 2-3 per cent like clockwork.
The driver of demand weakness is the collapsing property market, which is undergoing a structural adjustment to lower supply.
New builds by floor area have already crashed. But property developers have so much half-built supply that the pipeline of construction has not yet caught down. It will:
There are offsets to this downdraft in Chinese exports, manufacturing and infrastructure but it is not enough.
Chinese property comprised 45 per cent of steel demand at its peak and needs to fall a lot further.
Greeting this demand hole in China is a global surge in iron ore supply.
Over the next two years, Brazil and Australia will bring to market another 100 million tonnes of iron ore supply through new and improved projects.
Then, from the end of 2025 and ramping up over thirty months, comes Simandou. A mining project of one of the world’s largest untapped deposits of iron ore, in Guinea, West Africa.
The “Pilbara killer” as it has been christened, is 120 million tonnes of the best ore money can buy.
In short, assuming only a subtraction of 2 per cent per annum, by 2028, the downdraft in Chinese steel output will accumulate to another 80 million tonnes of steel or 130 million tonnes of iron ore equivalent.
Add supply and you get a swing in the iron ore market balance to a huge 350 million tonne surplus.
The climate kicker
But that’s not the end of it.
In recent weeks, China has recommitted to the transformation of its steel market output from blast furnaces to steel recycling.
This process has disappointed before, owing to a shortage of steel scrap. But the will is there and is intensifying as Beijing expands its carbon price.
In the past three years, the number one support for the iron ore price during the Chinese property crash has been falling steel recycling in electric arc furnaces.
If the decarbonisation of steel resumes, then the marginal pressure on iron ore-fed pig iron will intensify even further.
2015 called and wants its iron ore back
There is no way around the conclusion that iron ore is entering its second great cost-curve cleanout in the last decade.
This looming adjustment appears even larger than the 2015 version, and this time it is permanent.
No iron ore supply gets shaken out until we are below $80 per tonne and the process from there is a long and grinding squeeze on costs for years as miners strive for survival.
Do not underestimate iron ore’s potential to crash well below “forecasts”.
David Llewellyn Smith is the editor-in-chief and publisher of MacroBusiness.