The end of the largest commodity boom of the 21st century: China destroyed it – and is now destroying it
Iron ore as a component of the Chinese economic boom
Fluctuations in global commodity markets are similar to tectonic processes in the earth’s crust: they are invisible to the general public, but they change the earth’s landscape. Iron ore, which played a major role in the Chinese economic boom of the last quarter of a century, brought about such tectonic shifts in the commodity market that affected the dynamics of global economic indicators in recent decades.
According to experts Bloomberg, it was amazing luck: from the late 1990s to early 2024, iron ore prices jumped nearly tenfold, more than any other commodity; trade volumes tripled; Australian commodity tycoons became billionaires; mining companies have become Wall Street favorites for a while; and for control over the last untapped deposits, powerful legal battles have unfolded.
“Severe winter” ahead for the iron ore industry
But everything comes to an end. It seems that the biggest commodity boom of the 21st century is over. China started it – and China is extinguishing it. The cost of the reddish substance, which is transformed in blast furnaces into steel, has fallen below $100 per metric ton. This is 55% less than the all-time high of almost $220 per ton in 2022.
These transformations are taking place in the context of a change in the economic model of China, which reached its peak demand for steel in 2020-2021. Currently, the Celestial Empire is betting on the service industry and abandoning large investments and housing construction.
During previous downturns, China has bailed out its economy, particularly its iron ore and steel sectors, by curbing debt-financed construction. This time around, however, Hu Wangming, chairman of China Baowu Steel Group Corp., predicts a “harsh winter” for the industry, saying the downturn will be “longer, colder and harder to endure.” Since China produces more than half of the world’s steel, this is hugely important.
How the decline in steel production rates will affect second- and third-tier miners
Thus, China, which produces more than half of the world’s steel, has reduced the pace of production. As a result, global steel production reached a plateau. Who will reduce production? Let’s look at the second and third level miners in Brazil, India, Ukraine, South Africa, Iran and Kazakhstan. An increase in the price of production to 50-100 dollars per ton will displace them, as well as Chinese miners, which will restore the balance in the market. The correlation here is as follows: the more tonnage is displaced, the lower the prices fall – and vice versa.
Major companies say many tier-three miners have costs of around $80-$100 per tonne. If prices fall above the current level ($90 per ton), some high-cost producers will go bankrupt, production will decrease, leading to an imbalance in the market. Only a significant oversupply can force second-tier miners (whose costs are $60-$80 per ton) to stop mining to bring prices closer to $50 per ton, as history shows.
In the second half of the 20th century, iron ore prices were set once a year in secret negotiations between miners and Japanese steelmakers, rather than daily in brutal trading conditions. It was not until the early 2000s that a daily iron ore spot market emerged, and in 2010, during China’s economic boom, the system of annual price negotiations collapsed and was replaced by a system of long-term contracts tied to daily prices.
Who will be at the forefront of the iron ore industry instead of China
The holy place is not empty: other countries can, of course, become leaders in demand for steel. The most obvious candidate for this role is India with its powerful ore deposits. Unfortunately for the global iron ore seaborne market, India is likely to be import-free in the near future. Ferrous metal scrap and hot-briquetted iron are also important raw materials that allow saving natural and energy resources in steel production.
A peak in steel demand will not lead to a crash in the iron ore market. Although the rate of steel consumption in China will slow down, it will still remain at a high level in the near future. This is facilitated by the stable demand for “flat steel” (used for the production of cars, refrigerators, etc.).
It is worth noting that the slowdown in ore demand in the Middle East is due to the emergence of new large, low-cost mining mines in Australia and Africa. By 2028, they could add about 150 million tons to the sea freight market, which is about a tenth of the current market size. That is, it provokes an excess volume of iron ore on the global market. Iron ore prices are forecast to decline, but the exact level will depend on the commissioning of new mines and the situation in the real estate market in China.
If iron ore production increases, up to 200 million tons may need to be displaced, which is 1/8 of the market served by sea transport. A similar oversupply has already been seen in the past, when iron ore prices fell to around $50 per tonne.
Iron ore prices have fluctuated significantly in recent decades. The beginning of the 2000s was the period of the “commodity boom”, when prices rose sharply in the context of the industrialization of China. Despite the recent decline, prices remain high at around $100 per metric ton, which is 7-8 times higher than the 1980-2000 average price. This is caused by a significant increase in prices in previous years.
The best miners are making good money right now. For example, Rio Tinto Plc. – the world’s largest iron ore miner – mines the mineral in Western Australia at a price of $21 per ton. Even at the current lower price, the company will make a profit of 40-50%. However, if prices fall to $50, this could negatively affect large producers and trigger mergers and acquisitions.
Tatyana Morarash
