GLOBAL STEEL USE BETWEEN 2023 AND 2035 TO RISE TO 2 BILLION TONNES FROM 1.764 BILLION TONNES

China, which is by far the world’s largest importer of iron ore required to run the BF-BOF segment of its giant steelmaking industry presents analysts with the riddle surrounding continuing arrivals of the raw material at
Chinese ports in high volumes in the face of steel production fall. The country’s imports of iron ore in the first seven months up to July were 6.7% up year-on-year to 713.77m tonnes. But in the first half of this year, production of crude steel was down 1.1% to 530.6m tonnes. No wonder then inventories of the steelmaking
ingredient at Chinese ports are sitting at elevated levels vis a vis established seasonal norms. The riddle becomes even more tricker by high summer ore imports when mills routinely apply brake in capacity use in response to steel demand fall from construction and housebuilding sector.

As the pressure of decarbonisation mounts and the demand for clean (better to say green) steel grows across the world, the demand of steelmakers for iron ore with very high fe (iron) content will continue to rise. But it is becoming increasingly challenging to get ore with 64 per cent and more iron in it in big volumes. Iron ore is the principal feedstock of steel produced through the blast furnace basic oxygen furnace (BF-BOF)
route. Even while serious attempts are made to improve circularity in the steel industry by enhancing electric arc furnace capacity in the West, China and India, McKinsey says in a report that the share of “crude steel from the BF-BOF route is expected to drop from around 70 per cent to around 60 per cent between 2023 and 2035.” At the same time, says the report presented at the recent Delhi conclave of Indian Steel Association, the global steel use during this period is estimated to rise to 1.95 to 2 billion tonnes from 1.764 billion tonnes.

Beijing based consultants SteelHome says in a report port stockpiles of ore have been rising steadily since reaching a seven year low of 104.9m tonnes in the final week of October. Underlining the continuing strength in imports, monthly port stockpiles are showing an average gain of 6.06m tonnes. SteelHome informs Chinese ore inventories across ports as of July 26 rose 1.47% week-on-week. Even then inventories will have to climb further before they hit the May 2018 record high of 160.6m tonnes. China being an importer of such big volumes of iron ore, there inevitably is a strong correlation between ore prices globally and going beyond what it buys to actual end use. What automatically follows is that if iron ore keeps accumulating at ports and also with steel mills beyond certain volumes, prices of the raw material will come under pressure.

Take Singapore Exchange where ore with 62% contained iron hit an 18-month high of $143.60 a tonne On January 3 and since then the market is facing headwinds. Expectedly, the causes of iron ore bearishness are mostly on account of the woes of the Chinese economy and that includes insufficient domestic demand for steel and falling prices eroding margins of steelmakers. For instance, China’s gross domestic product
decelerated to 4.7% on the year in the second quarter in 2024 from 5.3% in the January-March quarter. Moreover, the country’s factory activity contracted for a third straight month in July, leaving the economy in a weak trajectory.

The official manufacturing purchasing managers’ index for July was 49.4 according to China’s National  Bureau of Statistics. The number was slightly worse than June reading. A Singapore based iron ore merchant trader visiting India told DCI: “We hope following the recent Chinese Communist Party politburo
meeting, President Xi Jinping would turn the focus on boosting consumption to combat ‘insufficient domestic demand. “The major challenge is to revive the real estate sector and fund infrastructure development through appropriate stimulus. All this will generate domestic demand for the steel industry and in turn for iron ore.”

Every time there is a dip in ore prices, buying for delivery to China sees a spurt and that explains the relentless accretion in port stocks all this while. Chinese steel industry’s working experience says profits become elusive once iron ore costs more than $100 a tonne. Now production and demand are down, steel prices are agonisingly low and mills in order to avoid growth in factory stockpile of steel products have turned into aggressive exporters allegedly often at below production cost. In the given circumstances, high ore imports by China could be either in anticipation of the government announcing at some point stimulus
measures for the real estate sector or this could be yet another instance of part of national strategy to support buildup of inventories of a number of commodities, specially the ones with high import dependence.

The ground reality for the steelmaking ingredient is that China, which last year had a share of 53% of global steel production and also features in about 75% of all seaborne iron ore trade has decided to restrict annual metal output at around 1bn tonnes for two considerations. First, China’s crude steel demand is unlikely to
see any major improvement from 911m tonnes in 2023 in view of tepid performance of the economy. Second, climate change being a major concern for Beijing with the campaign for clean air being assiduously led by President Xi Jinping himself, a principal target for housecleaning is naturally the big polluter steel industry. Incidentally, steel mills account for nearly 16% of China’s total emissions. This is double the global emission average for steelmaking.

As Beijing is targeting peak carbon emissions by 2030 and carbon net zero by 2060, mills have come to
realise that the journey to green steel will be facilitated by the use of better grades of iron ore. Experts describe ore with high iron content whose use limits energy intensive sintering is the low hanging fruit for the industry told to reduce emissions at an accelerated pace. Blast furnace (BF) efficiency improves when
ore bearing high iron and low impurities such as alumina and silica is used. At the same time, steelmakers armed with BF and basic oxygen furnace (BOF) could be a lot less environment fouling in its operation by switching to higher grade agglomerates such as pellets and direct reduced iron (DRI), using iron ore fines and low grades of ore. This will explain why Chinese steelmakers have stepped up buying of better grades
of iron ore in recent years.

Supply of very high iron contained ore to Chinese mills in particular and also to others will get a boost once operationalisation of mines at Simandou in West Africa’s Guinea begins by December 2025. Simandou, which holds by far the largest deposit of iron ore of a quality not easily available, should have been in production years ago but for interminable delays caused by political uncertainty, ownership disputes and widespread corruption That the mining giant Rio Tinto secured its first exploration licence in 1997 goes as proof of uncertainty that surrounded project implementation and funding issues all these agonising years. Simandou holds over 2 billion tonnes of ore with iron content 65% mostly, a rare global phenomenon. In fact, once ore starts flowing in volumes from this Guinean deposit, it will have the potential to challenge the dominance of Pilbara region of Western Australia, the world’s largest producer and exporter of the ingredient.

Even while Western Australia has the biggest share of global crude iron ore reserves at 24%, the average iron content there is 62% in line with the world average. High grades of ore are preferred by mills for these contain fewer impurities and for the miners these have a significant impact on operating margins, helped by the premium such ore commands in the market. The interesting thing about Simandou is the involvement of a number of Chinese companies through Chalco Iron Ore Holding (Baowu group owns 20% of it) and Singapore based Winning International. Chinese investors have been drawn to Simandou for the size and quality of ore found here. There is also the consideration of China diversifying sources of iron ore imports, particularly Australia with which Beijing had quite a few rather serious run-ins. By far the major part of Australian iron production in 2023 of 960m tonnes was shipped to China, which yielded a record 85% of $ 136bn revenue for Australia from iron ore exports.

No doubt the major part of Simandou production will find its way to China whose steel production is more than that of the rest of the world. Canberra has every reason to be concerned about iron ore of very high quality starting to flow from Simandou hopefully in a year and a half posing some threat to Pilbara ore exports. This is despite the freight advantage that shippers from Australia will always have over despatches from competition to emerge from West Africa. Guinea is roughly 7,700 nautical miles or 14,260 km farther from Australia and iron is a bulky commodity making it expensive to transport.

But as steel mills in China in particular and elsewhere too will have the compulsion to use the relatively new capital equipment for a good number of years till their renewal becomes due and still will be required to cut carbon intensity they likely will be ready to pay extra freight for Simandou ore. Simandou reserves have been
assigned to separate consortia for development. Blocks three and four are with Rio Tinto and China’s CIOH owned by Aluminium Corporation of China (75%), Baowu Steel (20%), China Harbour Engineering (2.5%) and
China Railway Construction Corp (2.5%) while blocks one and two are to be commissioned by Winning Consortium Simandou (WCS) of which the partners are Singapore headquartered Winning International Group, Weiqiao Aluminium and United Mining Suppliers. The total investment across the four blocks will be
around $25bn, making it the single largest investment in African continent.

A Rio Tinto official said that the Simandou project at its full capacity use could raise the country’s GDP by 50%.At over 2bn tonnes, Simandou is among the largest single location iron ore reserves in the world. Citing the example of Australia and a few other ore bearing countries where new deposits keep on being discovered in the course of intensive exploration and mining, the director general of Federation of Indian Mineral Industries (FIMI) RK Sharma says, “same will be the case with Simandou.” However, what needs to be factored in is the Guinean proneness to political instability, policy uncertainty and rampant corruption.

Notwithstanding its potential, it will be some years before Guinea emerges as a significant supplier of iron ore. In the meantime, according to a study, global ore production estimated at 2.4bn tonnes in 2023 is likely to register a CAGR of 1.9% till 2030 when output should be 3.004bn tonnes. Expectedly, the world’s two
industry leaders Australia and Brazil will be contributing the maximum to the growth by way of commissioning new mines and capacity expansion at operating sites. This, however, has to be seen against the warning by the Reserve Bank of Australia that Chinese demand for iron ore may have peaked, setting the scene for a potential multi-decade hit to government revenue and profits of mining groups.

Hasn’t Beijing wanted the steel industry to restrict production around current level? Moreover, the industry is encouraged to realise the country’s potential to make steel through the low carbon route of electric arc furnaces (EAFs) where the feedstock is steel scrap and not iron ore. Global Energy Monitor informs that by January 2024, China had installed 151m tonnes of EAF exceeding the 2025 target capacity of 143m tonnes needed to have a 15% share of total crude steel production. International Energy Agency’s net zero by 2050 target demands in that year the global steel industry will be required to use EAF technology for 43% of total primary steelmaking with hydrogen-based DRI. All these factors combined will make the demand outlook for ore somewhat complicated. What, however, looks certain is that Chinese demand unlikely to show any
significant changes, supply will remain the principal price decider for iron ore. Furthermore, in view of the mounting pressure on steelmakers to become carbon neutral, miners will be obliged to focus on improving ore quality in alignment with changing demand profile.