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May 10, 2017
Peak iron ore on the horizon?
By: John E. Lichtenstein

Once again, it is good times for the iron ore miners: global steel production through February 2017 is up 5.8 percent over last year;1 prices remain buoyant; and, counterintuitively, China continues to make progress in reducing iron and steelmaking capacity. China’s progress is positive for both iron ore pricing and for global miners because the capacity being shuttered tends to be the smaller, inland furnaces, which use a higher percentage of domestic ores compared to the newer, coastal steel plants.

The positive global production and capacity reduction trends should continue in the short term, providing pricing support for iron ore, although the very recent softening in domestic Chinese steel prices likely portends downward pricing pressures.

The longer-term outlook is even more problematic, at least in terms of demand. Based on Accenture’s latest research, global iron ore demand is expected to grow until approximately the middle of the next decade, at which point it will peak at a little more than 2.2 billion tons compared to approximately 2.0 billion tons in 2016.2

There are three main drivers for this outlook:

  • Global steel demand growth is slowing. We are likely to see near-term cyclical recovery translating into decent growth, yet our research suggests that global consumption will grow at only 1.1 percent per year until 2035.3 Contributing factors include expansion of the circular economy, changing consumer preferences, premature de-industrialization in developing economies, and accelerating material and process substitution.
  • Increased carbon emissions costs will drive an increase in electric furnace steelmaking. With the notable exception of the United States, most countries and regions are expanding their efforts to limit carbon emissions and are targeting large industrial emitters such as steelmaking. The likelihood that hydrogen-based steelmaking will not be commercially available in the next 20 years means that conversion from basic oxygen-based to electric arc furnace (EAF)-based steelmaking will remain the primary technology lever that the industry can use to respond.
  • A growing surplus of scrap in China will support the growth of EAF steelmaking. This surplus, combined with a heightened natural concern for air quality, is expected to lead to an increase in the EAF share of Chinese steelmaking—from 6 percent today to at least 10 percent and as high as 20 percent by 2035.4 Even if the EAF share in China reaches 20 percent, our research suggests that there will still be sufficient excess scrap available through exports to keep the rest of the world in balance. It is likely that excess domestic scrap supply will, in the first instance, be used to reduce hot metal ratios in oxygen furnaces, yet the implications for iron ore demand are similar.

While total global demand for iron ore is expected to peak around 2025, the decline in the ensuing decade will likely be gradual. This is, in part, because the average EAF iron charge in all forms is expected to increase as the share of flat-roll production increases; and, it is also a result of greater EAF output from direct reduced iron (DRI)-based production units (i.e., the Middle East).

Even while we expect faster growth in EAF output, global blast furnace-based production should increase over the next decade as India and South East Asian countries increase their output. These increases will more than offset the expected decline in Chinese blast-furnace production until the middle of the next decade.

As always, China is the wild card in this assessment. We expect total Chinese steel demand to decline despite continued economic growth since the two are rapidly becoming decoupled. The return to high levels of fixed asset investment will prop up economic growth and steel consumption in the short term, but is not sustainable in the long term.

Chinese steel production will likely fall in line with domestic consumption, and potentially even more so as steel exports are restrained by global protectionism. Even if a significant portion of China’s 100 million tons of direct steel exports are replaced by an equivalent amount of indirect exports, it will not be sufficient to sustain global iron ore growth much beyond 2025. We see China’s share of global iron ore consumption falling from 58 percent today to approximately 40 percent by 2035.5

What does this all mean for mining companies?

Global miners should start to incorporate this more somber demand growth scenario into their long-term strategic planning, as well as the expected pivot to DRI grades and accompanying pelletizing requirements. They should also assess their competitive positioning in a future market in which demand momentum shifts from countries with limited high grade ore (China) to those which are potentially self-sufficient (e.g., India).

For potential new (or renewed) entrants who are enticed by today’s pricing, investment restraint is strongly advised since expected global demand growth will not support additional capacity beyond what is already in the pipeline and latent in existing operations.

For additional insights on the global steel industry, read the Accenture Strategy report, “Steeling for disruption: Global steel producers must reinvent themselves as demand growth disappears.


Footnotes:

1
“February 2017 crude steel production,” World Steel Association, 22 March 2017, https://www.worldsteel.org/media-centre/press-releases/2017/february-2017-crude-steel-production0.html (accessed 10 April 2017).
2
Accenture Strategy forecasts using historical data from the World Steel Association.
3
Ibid.
4
Ibid.
5
Ibid.

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