At the moment Australia’s big iron ore miners are riding high as strong Chinese demand continues to keep prices high and profit margins very strong.
However, there are signs that the iron ore boom may be in the early stages of weakening, with some short-term and long-term headwinds starting to form.
That would really suit the Chinese customers, given that Australia is hardly at the top of their Christmas card list at the moment as a trade war rages on several fronts.
Is Chinese iron ore demand about to soften?
One of the reasons the commodities super cycle may not be as kind to iron ore is that Chinese demand is forecast to soften by some observers.
Despite significant economic growth in China and heavy stimulus, credit growth in the country is beginning to slow as the Chinese government begins restrictions on property in a bid to cool activity in the sector.
Less building means less demand for steel and its main ingredient, iron ore, which is the first of the short-term worries for the sector.
Brazil is getting exports back on line
The second short-term bad sign for iron ore is that the second major iron ore exporter, Brazil, is beginning to get on top of supply issues caused by the COVID-19 pandemic and high-profile issues with tailings dams.
Broker UBS, which has now moved shares in all three of the major Australian iron ore miners to neutral from buy, estimates supplies from Brazil have risen 17% in the year to date as mines move to capitalise on current high prices.
The broker claims Chinese ports and steel mills have also been building up iron ore inventories, indicating that the tightness in the iron ore market is starting to ease a little.
Once those inventories get large enough, they begin to put downward pressure on the iron ore price because customers can ride out any short-term supply issues.
Another continuing issue is new pollution control restrictions on steel production, with the latest imposed by the Tangshan local government set to have some impact on the Chinese steel mills.
Longer term issues if African iron ore starts to flow
In the longer term, the really big issue confronting the iron ore miners is the potential for a really large new supplier.
At the moment, Brazil and Australia supply the vast bulk of the high-quality seaborne iron ore to the world’s markets but that situation could be about to change.
China has not been standing still as it reluctantly hands windfall profits to the Australian miners, even though it has been careful not to push so hard on Australian trade issues that it threatens the supply of Australian iron ore.
Australian barley, beef, timber, coal and wine are one thing but it would be quite another if China were to really shoot itself in the foot by disrupting the Australia-China iron ore trade at a time of elevated prices and strong demand.
China needs Australian ore – for now
In simple terms, China can’t survive without Australian iron ore and both sides are acutely aware of this dynamic.
However, China has been accelerating its plans for iron ore projects in Africa and also within Australia, as it seeks to reduce its dependence on Australian supplies from the big miners, which make up around 60% of all Chinese iron ore demand.
It has also been ramping up purchases from minor producers such as South Africa and India and from its local mines as it seeks to diversify supply options.
Will the Pilbara killer finally arise?
The really big new supplier could be from Guinea in Africa, with plenty of talk about the proposed Simandou mine becoming a “Pilbara Killer.’’
While nobody underestimates the potential of Simandou, the debate centres around how fast it can be brought into production given that seaborne iron ore supply revolves around cheap and efficient rail haulage to ports.
Many proposed iron ore projects have fallen over due to infrastructure issues rather than any issues around the quality and grade of the ore.
Simandou is said to be the largest untapped iron or deposit in the world with the project mooted to being capable of supplying 100 million tonnes of iron ore a year, with first production due in 2025/6.
Many don’t believe Simandou will be exporting soon
Critics say that timetable is laughable and it will take at least a decade to get Simandou up and running and even then, only if the project doesn’t hit any unexpected technical or political hurdles.
Both Rio Tinto and Chinalco have been involved in developing Simandou but there have been plenty of allegations of corruption within and between a raft of companies in relation to Simandou mining rights.
Guinea also has other iron ore projects including Kalia and Zogota, which are expected to start operating in a couple of years with a combined production capacity of more than 20Mt.
China has a foot in the door
Late last year, a Chinese backed consortium also won a US$14 billion (A$18.4 billion) deal to develop part of the Simandou project and China has been very successful in establishing and growing partnerships within African nations in recent years, becoming the largest trading partner of South Africa and running several successful infrastructure projects across Africa.
While the prospects for Simandou production remain hotly contested, it is worth remembering that many iron ore experts poured scorn on Fortescue ever going into production – something that a then-unprecedented price boom due to Chinese development brought into being.
While plenty of hurdles remain, it would be unwise to discount the possibility of Simandou changing the global iron ore market in the future, once again driven by Chinese demand and a wish to diversify sources of supply.