Why Australia’s iron ore project is doomed

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The headlines scream: iron ore is back.

The bears who are pessimistic about the strength of the market have to get their hands dirty because they have misjudged the price once again.

However, this assessment of the iron ore market is wrong for two reasons.

First, China is currently experiencing a major, most likely structural, crisis in its steel industry.

Just as bears predicted, this is largely due to the failure of China’s real estate investment model.

The price of Chinese steel is expected to fall by two to three percent this year, an unprecedented decline for three years in a row.

According to the latest data, Chinese steel production in April was 12 percent below the record year of 2021.

This equates to around 130 tonnes of steel per year, which is equivalent to 200 tonnes of iron ore; enough to have ruined the Fortescue Metals Group.

However, this is not the case. Instead, Chinese steel recycling has been destroyed.

Whether intentionally or accidentally, China has betrayed its own five-year plan to increase recycled steel production and instead allowed it to collapse.

Because recycled steel is made from scrap steel in electric arc furnaces, conventional blast furnace steel – or “pig iron”, which is made from iron ore and coking coal – has been almost entirely spared from the requirement.

For China, however, this strategy is one of diminishing returns. Soon, the Chinese steel industry will be forced to price its carbon emissions at home and abroad, and the pro-carbon steel industry strategy will fail.

The second factor that continues to benefit iron ore bears is the fact that high prices have been so generous that the supply-side response continues to increase.

This month, the Onslow Hub in Australia was added, securing a significant new supply of 30 million tonnes.

The major producers will do a lot more of the same in the future. The increase will be particularly strong in 2026/27 when the Simandou mine in Guinea, or “Pilbara Killer” as I called it a few years ago, arrives.

This gigantic mine is expected to produce 120 million tonnes of the world’s finest iron ore over the next few years.

The timing of this coincided with the sustained and permanent collapse in Chinese demand resulting from the reversal of the demographic dividend.

Australia should avoid boasting about the relative strength of iron ore and instead focus on the looming price collapse, which has become more apparent than ever.

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