In a statement that is likely to ruffle feathers in the boardrooms of many mining companies, BHP (ASX:BHP) has predicted a challenging future for the iron ore market. The Australian mining giant believes that the commodity's days of soaring prices are over, citing China's economic slowdown and increased supply as key factors.
China's shift in economic growth policies and its sluggish economy have combined with oversupply to create a gloomy outlook for iron ore in the coming years. This is bad news for economists, analysts, and mining companies alike, who may face significant financial pressures.
However, BHP does see a glimmer of hope on the horizon. The company anticipates a surge in demand for iron ore from India towards the end of this decade, which could help to offset the declining appetite from China.
The pressure on iron ore prices is further exacerbated by overcapacity. BHP's economists estimate that up to 170 million tonnes of iron ore per year could be priced out of the market if prices remain at current levels or fall below $80 per tonne. This is due to a combination of plateauing or weakening Chinese demand and increased consumption of scrap by steelmakers.
The cutoff point for many high-cost producers is between $80 and $90 per tonne on a CFR basis. This means that up to 170 million tonnes of ore per year could be too expensive to mine and sell to China or other major buyers, such as those in Australia and South Africa.
Gina Rinehart's Roy Hill mine in the Pilbara is expected to fare better, but its relatively small capacity of around 55 million tonnes per year may limit its ability to maintain its market position.
Smaller producers, such as Anglo American's Kumba Iron Ore, Mineral Resources WA mines, and magnetite mines in Tasmania, South Australia, WA, and Canada, are particularly vulnerable to the declining iron ore prices.
The Simandou iron ore deposits in Guinea, which are being developed by Rio Tinto and its Chinese partners, are also facing significant challenges. The project is expected to be high-cost and complex, with potential political and shipping issues in the future.
Moreover, the Simandou project is seen as a Chinese government vanity project aimed at punishing Australia's large shipping companies. This suggests that Chinese buyers may prioritise Simandou ore over Australian ore, further impacting the market.
In its annual commodity outlook, BHP's economists forecast continued surpluses for iron ore globally. They estimate that the real-time cost support for iron ore prices remains in the range of $80 to $100 per tonne on a 62% Fe CFR basis.
The company believes that if surpluses persist, some high-cost suppliers will eventually be forced out of the market. The stabilisation of China's property sector and the government's approach to regulating steel production will be critical factors in determining the market's trajectory in the coming years.
In the medium term, BHP expects China's demand for iron ore to decline as it moves beyond the crude steel production plateau and increases its use of scrap-based steelmaking. While China's steel production is expected to remain above 1.0 billion tonnes, pig iron production is likely to decline.
BHP's outlook also highlights the impact of increased scrap availability due to government scrappage programs in China. This will help to reduce China's reliance on imported iron ore and coal.
In the first half of 2024, iron ore prices traded within the range of $100 to $120 per tonne. However, BHP expects port stocks to remain elevated and for surpluses to persist into 2025. The company's estimate of cost support remains at $80 to $100 per tonne CFR.
BHP's outlook for coking coal is similarly negative. The company forecasts a surplus for both 2024 and 2025. This is particularly concerning for BHP and its partner Mitsubishi, who are the second largest exporters of coking coal.
While there has been some price volatility in the steelmaking coal industry, BHP expects overall seaborne supply to be in mild surplus in 2025. The demand for premium coals is expected to remain relatively tight, but China's reliance on the seaborne market has decreased due to increased imports from Mongolia.
India is now the largest and fastest-growing steelmaking coal import region, which could lead to increased price competition among suppliers.
