Mining.com yesterday noted that the Northern China benchmark iron ore price lost 1.4% to $64.10 per dry metric tonne, down more than 6% from 16-month highs hit last week.
The steelmaking raw material still boasts a near 50% rise year to date and an almost three-quarters surge from 9-year lows reached mid-December.
Given that it forges half the world’s steel and consumes more than 70% of the 1.3 billion tonne seaborne trade, the iron ore market is reliant, more than any other commodity, on the Chinese economy. The surge in iron ore over the past four months has come mainly on the back rapidly rising steel prices in China – up by a fifth just in April in never-seen-before volume. This price is in danger of reversing.
Morningstar’s equity analyst David Wang shares his prediction and explains why:
Shares of iron ore and met coal miners have rallied driven by increased optimism around Chinese demand for these commodities. Iron ore prices have risen to $60 per tonne from $37 in December. We expect falling Chinese steel demand and increased Chinese scrap availability to cut iron ore prices in half.
While investors have accepted that Chinese steel demand has peaked, most continue to underestimate how far it will fall. Consensus sees Chinese steel demand stabilising around last year's 700 million tonnes, but we see continued declines to 630 million over the next decade due to faltering construction activity.
The threat of steel scrap availability is another factor that's not fully appreciated due to the long-term nature of the threat, but we think the impact will be significant.
Leveraging academic work on steel product life cycles, we forecast scrap supply to more than double by 2025, with growth accelerating in the decades beyond as buildings and long-lived structures approach end of life. This drives greater production from electric arc furnaces and displaces iron ore and met coal demand.
Over the next 10 years, these factors should reduce China's iron ore demand by the size of total consumption of Japan, the world's second-largest consumer.
