Sign iron ore price is about to crash as Chinese construction slows dramatically


It may surprise Australians to know that the long-term real iron ore price is about $60. That is a long way below the price we have enjoyed for 20 years and far below the $150 or so we have today.

But there are good reasons for such a low long-term price. Iron ore is not rare. It’s not precious. It has no intellectual property. Nor point of difference. It is highly contestable.

It is dirt, pure and simple.

As it happens, Australia has a lot of better-quality dirt that is very conveniently placed for shipping to China. So, we have developed gigantic machines to shovel it onto ships and sail it to China ahead of everybody else.

Perhaps the greater point is that China has needed so much of it that it has made the most common and worthless of commodities incredibly profitable for 20 years.

End of an era

China can do this. Its demand has been so vast in the 20-year build-out of a modern economy that it has even created a shortage of dirt.

But nothing lasts forever, and there are signs that before very long, iron ore will be dirt again.

Chinese demand for iron ore is slowing down. Indeed, it has been falling for two years.

The primary cause of the downturn is the end of an era for Chinese construction.

For 20 years, China has built mind-boggling quantities of apartments, malls and office towers as a part of its great urbanisation.

But that process is now winding down as the stock of floor area under construction shrinks for an unprecedented successive year.

And there is every reason to think that the wind-down will be swift and structural.

The largest component of construction by far is residential. The damage from Xi Jinping’s decree, which has been crushing that sector for two years, is irreparable.

Indeed, if we look at the flow of new starts for apartment towers, they project much worse ahead for the stock construction volumes:

Sales of new apartments have rebounded a little more from these levels, but developers are so hamstrung by their inability to raise finance that they are clearing huge inventories instead of building new blocks.

This could go on for years.

Steel and iron ore the pair from hell

Chinese urban construction was the largest consumer of steel in the market, at roughly 40 per cent.

There is an enormous downside to demand as construction adjusts to the new reality.

So far, China has dropped about 6 per cent of its steel output since its 2021 peak. But ahead is another 10-20 per cent downside depending on where construction ultimately settles.

There are offsets. China is building more infrastructure. Though that, too, is looking heavily indebted and softer this year than last.

China has shuttered large swathes of steel recycling to absorb the impact, which has protected the blast furnaces that use iron ore. But this runs contrary to every commitment in the Five Year Plan to expand low-carbon recycling.

But nothing can fully offset the scale of the correction that is underway in property. It is 100-200 million tonnes of lost steel demand ahead.

This is 161-322 million tonnes of iron ore. This demand is equivalent to somewhere between the total production of Fortescue Metals Group and Rio Tinto.

The Aussie majors won’t go bust because they make money right down to about $35 per tonne.

But everybody else will, and it will likely crash the iron ore price in the process.

$40 iron ore has been the norm throughout history. It will mean-revert as China goes ex-growth.

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geopolitics and economics portal. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review



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