China cuts steel output, pressure on Australian iron ore?

Investors are bracing for sharp cuts in Chinese steel production, which could hit Australian iron ore miners.

Resource investors are bracing for a sharp cut in Chinese steel production that could hit Australian iron ore miners, while the market is also facing increased supply from major new projects in Africa.

Although the amount of cuts is uncertain, the market predicts that China could reduce steel production by up to 50 million tons this year. Illustrative photo

The negative impact will mainly affect small producers.

However, fund managers predict that the negative impacts will mainly affect smaller producers, where mining costs are significantly higher and the quality of iron ore is often lower than that of major groups such as BHP and Rio Tinto.

“ Companies like BHP and Rio are still making fantastic margins at current prices. If iron ore prices fell to $80 a tonne, they would still be able to maintain healthy margins, ” said Sam Berridge, portfolio manager at Perennial.

Last week, the Chinese government announced it would order nationwide steel production cuts to reduce the oversupply that is affecting the steel industry and restore profits. The prolonged slowdown in China’s property market since the Covid-19 pandemic has led to a huge surplus of steel, much of which has been exported, affecting Australian producers such as BlueScope Steel and the struggling GFG Alliance’s Whyalla plant.

“ China’s steel exports have been growing strongly over the past few years – it’s their way of dealing with the excess steel that the domestic market can’t absorb, ” said Sam Berridge. But now the overseas markets are almost saturated, so to protect the domestic industry they will have to cut production.

While the extent of the cuts remains uncertain, the market is predicting that China could cut as much as 50 million tonnes this year – about 5% of its annual steel consumption of around 1 billion tonnes. If that happens, China’s steel output would fall to its lowest level since 2017, reducing demand for iron ore at a time when supply from Africa is surging.

Rio Tinto expects to start production at its Simandou project in Guinea later this year, bringing its capacity to 120 million tonnes – about 7% of the seaborne iron ore market. This is the largest addition in a decade and is expected to have a significant impact on iron ore prices.

Futures traded in Singapore fell below $100 a tonne last week for the first time since mid-January, closing at $99.85 a tonne on March 7. Spot prices have also fallen from nearly $110 a tonne two weeks ago to just above $100 a tonne, according to S&P Global.

Robert Rennie, head of commodity strategy at Australia’s Westpac Bank, said he expects high inventories at Chinese ports and a slowdown in steel production to keep prices below $110 a tonne for the foreseeable future. “ We expect iron ore prices to fall significantly throughout this year and into 2026 ,” he said.

However, Ben Cleary, portfolio manager at Tribeca Global Natural Resources Fund, said most Australian iron ore producers would not be severely affected.

“ The steel production cut alone is not a big problem for Australian iron ore producers , which supply high-quality steelmakers at lower costs, ” he said, adding: “ The bigger impact for Australian producers will be the arrival of high-grade iron ore from Simandou later this year, which will add competition and partially replace Australian supply .”

Exceeded expectations

Iron ore prices have been resilient since the start of the year, after a volatile 12 months when China’s property crisis saw prices fall nearly 30%. Now, the world’s largest steel producer is entering a period of strong cyclical demand in March and April, which could boost iron ore consumption and sustain prices in the short term.

Iron ore prices were also supported by bad weather in Western Australia, which disrupted supplies at the country’s largest export hub – Port Hedland in the Pilbara – in January and February.

Supply disruptions have contributed to a 2% drop in Australian iron ore exports this year compared to the same period in 2024, with inventories at Chinese ports falling 4% last week alone.

However, the market tightening is expected to be temporary, with analysts at Goldman Sachs noting that Australian exports rose sharply in March, while output from major producer Brazil also increased.

Goldman Sachs said the market is in balance, but it still forecasts China's crude steel output to fall 1% this year, mostly concentrated in the fourth quarter.

Coupled with increased supply, this will lead to a surge in iron ore inventories, pushing prices below $90/t by the end of this year.

“ Iron ore has had a spectacular rally over the past two decades, and it is unusual for a commodity to be able to maintain such high prices for such a long time with such strong margins, ” said Sam Berridge, portfolio manager at Perennial, who forecasts prices will fall to $80 a tonne.

Some experts predict the sell-off could be even more severe, with Westpac Bank warning that prices could plunge as much as 30% this year, to as low as $70 a tonne.

Last week, the Chinese government announced it would order nationwide steel production cuts to reduce the oversupply that is affecting the steel industry and restore profits. The prolonged slowdown in China’s property market since the Covid-19 pandemic has led to a huge surplus of steel, much of which has been exported, affecting Australian producers such as BlueScope Steel and the struggling GFG Alliance’s Whyalla plant.

Minh Hien

According to AFR