The iron ore sector, the cornerstone of the global steel industry, has been on a rollercoaster ride over the past year. As prices soared above US$120 per tonne in 2023, driven by strong demand from China’s economic recovery and supply disruptions, optimism pervaded the markets. But as we head towards 2025, storm clouds are gathering over the sector. Analysts are now warning that prices could drop below US$80 per tonne, making the short term outlook of this critical commodity uncertain. For investors with a stake in iron ore-related stocks, understanding the forces shaping the sector has never been more crucial.
Iron ore is the primary raw material used in steel production, and steel itself is essential for infrastructure, construction, automotive manufacturing, and an array of industries. China, the world’s largest steel producer, accounts for over half of the global demand for iron ore, making it the single most influential player in this market. Australia, meanwhile, is the leading exporter of iron ore, with over 60% of the world’s seaborne iron ore coming from its shores, primarily from the resource-rich Pilbara region in Western Australia. Brazil follows as the second-largest exporter, with major players like Vale operating massive mines.
The dynamics of this sector are intricately tied to the industrial health of China and the steady supply of high-grade ore from Australia and Brazil. A healthy global economy with robust demand for steel typically drives iron ore prices upward, fuelling economic growth in both producer (Australia, Brazil) and consumer nations (China). However, the ongoing shifts in global supply chains, coupled with challenges in China’s real estate and construction sectors, are poised to have a lasting impact on the sector.
In 2023, China’s real estate sector, which drives a significant portion of its steel demand, was showing cracks as major developers faced financial distress and shrinking housing demand. As China’s real estate boom cools, so too does its demand for steel—and by extension, iron ore. Analysts at the Commonwealth Bank of Australia (CBA) have warned that China’s steel crisis could deepen further as the property sector continues to slow, reducing its appetite for iron ore imports. With China consuming over a billion tonnes of iron ore annually, any drop in its demand has far-reaching consequences for global markets.
It is unclear if this week’s new Chinese stimulus measures could turn things around or exacerbate an already delicate situation.
On the supply side, Australia and Brazil continue to dominate the market, with iron ore production remaining relatively stable even as demand falters. This combination of steady supply and softening demand creates a supply glut, putting downward pressure on prices. In addition, producers have faced fewer disruptions, as mining operations, especially in Western Australia, largely avoided the major supply chain constraints that hit other sectors during the pandemic. These conditions, when combined with weakening demand from China, create the perfect environment for lower prices.
Iron ore prices have seen significant volatility over the past 12 months. At the beginning of 2023, prices hovered around US$120 per tonne, supported by expectations of China’s post-pandemic recovery and infrastructure investments. However, by mid-2024, prices had started to decline as the reality of China’s economic challenges came into focus. The sector’s dominant producers, including BHP, Rio Tinto, and Vale, have been watching these shifts closely, adjusting production levels to align with changing demand.
In September 2024, iron ore prices are currently around US$95-100 per tonne, marking a significant drop from the early-year highs. Market analysts now forecast that prices could fall below US$80 per tonne by early 2025, which represents a roughly 20% potential drop over the coming months. CBA’s research indicates that ongoing pressures in China’s construction and steel sectors could be the primary catalyst for this price drop. Such a decline could force some higher-cost producers, particularly in regions outside Australia and Brazil, to scale back or shutter their operations, as profitability at sub-$80 levels would be challenging to maintain.
For the iron ore market, a price below US$80 per tonne would represent a significant shift. In China, lower iron ore prices could bring some relief to its troubled steel mills, which have been struggling with rising costs and shrinking margins due to the slowdown in demand from the construction sector. The AFR reported last week that only 1% of Chinese steel mills are profitable at the moment.
However, a prolonged period of low prices could also signal broader economic challenges for the country, especially as its heavy industry sectors are a major part of its economic engine. Lower iron ore prices could translate into reduced steel output, affecting industries from automotive to shipbuilding, and placing more pressure on the already fragile Chinese economy.
Australia, and particularly Western Australia, would feel the impact of sub-$80 iron ore even more acutely. The Pilbara region, the backbone of Australia’s iron ore exports, is home to massive mining operations run by the likes of Rio Tinto, BHP, Roy Hill and Fortescue Metals. These companies have built highly efficient, low-cost mining operations that can withstand a price drop, however even they are not immune to the economic consequences. For the broader Australian economy, iron ore is a key driver of export revenues, contributing tens of billions of dollars annually (and billions in State and Federal taxes and royalties).
A sustained period of low iron ore prices would reduce export earnings, erode government revenues through lower royalty payments, and potentially slow investment in future mining projects. Western Australia, in particular, would face significant economic headwinds, as the state relies heavily on iron ore exports for economic growth and employment. Mining companies might be forced to reduce capital expenditures, lay off workers, or scale back expansion plans, which could have a ripple effect across the local economy.
This is on top of the nickel and lithium mine closures during 2024, which already put pressure on the mining sector. There are only so many gold mines that are expanding and can take on extra personnel.
For professional investors, the outlook for major iron ore producers is critical. BHP, Rio Tinto, and Vale are the dominant players in the global iron ore market, each with extensive mining operations and supply chains. These companies have historically thrived by maintaining low-cost production and delivering large volumes to meet China’s seemingly insatiable demand for steel. However, with prices heading towards US$80 per tonne or lower, even these giants will need to adapt (and are already starting to do so).
BHP and Rio Tinto, with their efficient mining operations in Australia’s Pilbara region, are well-positioned to weather lower prices. Whilst they can produce iron ore at costs below US$40 per tonne, ensuring that they remain profitable even in a low-price environment, significantly reduced margins will have an impact on dividends and growth potential in other parts of the portfolio. For Rio, this might result in a slower paced development of the new massive Simandou Project in Guinea.
Smaller producers and high-cost miners, particularly those operating outside the major production regions of Australia and Brazil, could be forced to shut down operations if prices remain depressed. This could lead to consolidation in the industry, as larger players acquire struggling competitors or close down less efficient operations.
While the near-term outlook for iron ore is clouded by falling prices and demand weakness from China, the longer-term fundamentals of the market remain intact. Steel will continue to be a critical component of global infrastructure and industrial growth, and emerging markets, particularly in Southeast Asia and Africa, are expected to increase their demand for steel over the coming decades.
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Photo by Engin Akyurt
