Citi analysts have shared their views regarding the potential repercussions of the anticipated steel industry reforms in China. They foresee what they term “supply side reform 2.0 in steel,” which could lead to decreased steel production and exports from the country.
This adjustment is expected to positively impact the profit margins of steel producers both domestically and internationally. However, the consequences for the iron ore market—which provides the essential raw material for steel—remain more ambiguous.
The analysts point out that the degree of impact on iron ore demand is more closely tied to steel demand rather than merely to production levels. They estimate that a reduction of 50 million tonnes in China’s steel output might only lead to about a 15 million tonne decrease in global iron ore demand, reflecting a modest impact of around 1% of the global seaborne market.
This suggests that the relationship between steel production and iron ore demand may not be as sensitive as might be assumed. In the short term, the report indicates that iron ore prices are more influenced by the margins of steel producers.
If these margins improve, it could lead to higher premiums for high-grade iron ore, which could offset any minor declines in the overall base price of iron ore. Citi also draws attention to the anticipated supply growth from the Simandou mine. The mine, located in Guinea, is projected to add 120 million tonnes to the market and may present a considerable risk to global iron ore prices in the medium term.
In summary, while China’s steel production cuts could enhance producer margins, their effects on the iron ore market are uncertain, heavily relying on fluctuations in demand. Additionally, with the imminent influx of supply from Simandou, downward pressure on iron ore prices may be expected in the years to come.