The Economic Importance of Iron Ore in Australia
Iron ore plays a crucial role in the Australian economy, significantly contributing to both profits and government revenues. In the fiscal year 2024, major mining companies like BHP Group Ltd, Rio Tinto, and Fortescue Metals Group Ltd generated an economic profit of approximately A$36 billion from iron ore alone. This accounts for a substantial portion of the total economic profit from Citi's Australian mining coverage, which stood at around A$39 billion.
Near-term and Long-term Outlook
Citi’s commodity strategists highlight the near-term support for iron ore prices due to the cost curve. When prices are high, China tends to import more iron ore from countries other than Australia, Brazil, and South Africa—around 20 million tons per month. However, when prices drop to the US$90-US$100 per ton range, these imports decrease to about 10 million tons per month. As of July, imports had fallen to approximately 14 million tons per month.
Looking ahead, Citi warns of potential long-term downside risks due to declining demand from China. The report forecasts a stable per capita consumption of steel in China at roughly 660 kilograms per person in the years 2026-2027, with a gradual decrease to around 560 kilograms by 2040.
Shifts in Steel Production
China's shift in steel production methods is also a critical factor. The proportion of electric arc furnace (EAF) based steel production is expected to rise from 10% in 2023 to 24% by 2040. Conversely, blast furnace-based production is projected to decline from 918 million tons in 2023 to 624 million tons in 2040.
Future Demand Projections
China's peak iron ore demand was 1.3 billion tons in 2020. Citi predicts a decrease to 1.1 billion tons by 2030 and 850 million tons by 2040. This expected reduction in demand could lower the global iron ore cost curve to about US$60 per ton, potentially removing 400 million tons per annum from the market.
By understanding these trends and projections, stakeholders can better navigate the potential economic impacts on Australia's economy, particularly in the mining sector.
