Australia’s mining industry is poised for good news as China's anticipated surge in scrap iron steel has failed to materialize. This development comes as three of Australia's biggest mining companies, BHP, Rio Tinto, and Fortescue, are scheduled to release their financial reports next week.
Iron ore, a key commodity for these mining giants, has maintained a robust price of above $100 per tonne for the past year, making it a significant profit driver for BHP and Rio Tinto, and the sole source of profit for Fortescue. However, concerns have been raised about a potential decline in iron ore prices due to dwindling construction activity in China, increased usage of locally collected scrap steel, and competition from new African mines, particularly Simandou in Guinea.
Westpac Bank's latest commodity research note predicted a lower iron ore price, projecting a drop from $127 to $113 per tonne in the June quarter, with further decline to $91 per tonne by the end of the year. However, Morgan Stanley disagrees with this outlook. In a note published on February 9, the bank suggested that iron ore prices would recover and potentially reach $140 per tonne in the June quarter, with the potential for further increase beyond that.
Morgan Stanley's analysis highlights the underwhelming performance of scrap steel in the Chinese steel industry. The bank argues that scrap, which primarily dominates in electric arc furnaces, has not been able to make significant inroads against iron ore as the dominant feed in blast furnaces. Recent estimates suggest that iron ore and metallurgical coal will continue to dominate steelmaking in China for the foreseeable future.
The failure of scrap steel to gain traction can be seen as contrary to expectations set by a 2017 McKinsey & Company study that projected a substantial increase in the availability of scrap. Even the Chinese government had anticipated a larger share of steel production from electric arc furnaces using scrap, but this forecast now appears overly optimistic.
Several factors contribute to the limited utilization of scrap steel, including ongoing deflation and weak steel profits in China. These circumstances have sustained demand for iron ore and dampened the scrap steel threat.
In conclusion, Australia's mining companies can breathe a sigh of relief as the anticipated surge in scrap iron steel in China has not materialized. This bodes well for BHP, Rio Tinto, and Fortescue as they prepare to release their financial reports. Iron ore prices have remained robust, contrary to predictions of a decline, thanks to the limited adoption of scrap steel in the Chinese steel industry. While challenges remain, the current market dynamics favor the continued demand for iron ore.
