Why Australia’s iron ore project is doomed

The headlines scream that iron ore is back.

Bears, those who are pessimistic about market strength, are getting burned because prices have gone wrong again.

But there are two reasons why this view of the iron ore market is wrong.

First, China is going through a major and very likely structural steel meltdown.

Just as the bears predicted, it is heavily based on the failure of China’s real estate investment model.

Chinese steel is expected to fall 2-3 percent this year, an unprecedented decline for three consecutive years.

According to the latest data in April, China’s steel production was 12 percent lower than the main year of 2021.

This is approximately 130 metric tons of steel annually, which is equivalent to 200 metric tons of iron ore; enough to wipe out Fortescue Metals Group.

But it didn’t happen. Instead, China’s steel recycling was destroyed.

Whether by design or by accident, China released its five-year plan to increase its recycled steel production and instead allowed it to collapse.

Because recycled steel is made in electric arc furnaces from scrap steel, traditional blast furnace steel – or ‘slag’ made from iron ore and coking coal – has been almost entirely omitted.

However, this strategy has diminishing returns for China. Soon, Chinese steel will be forced to price its carbon production domestically or abroad, and pro-carbon steel will collapse.

Another factor that still favors iron ore bears is that high prices have been so generous that the supply-side response continues to increase.

This month, Australia added the Onslow Hub, offering a not inconsiderable 30 mt of new supply.

There is much more of the same from the major manufacturers ahead. The increase is particularly strong in 2026/27 with the arrival of Guinea’s Simandou mine, or the “Pilbar killer” as I called it a few years ago.

This beast of a mine is expected to produce 120 mt of the world’s best iron ore over the next few years.

It coincides with the ongoing and sustained decline in Chinese demand stemming from its inverted demographic dividend.

Australia should avoid ranting about the relative strength of iron ore and instead focus on the looming fall in prices that has become more apparent than ever.

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