With uncertainty around iron ore demand, Citi sees a risk for Australian economy

Citi's commodity strategists highlighted the significant role of Iron ore fines 62% Fe CFR Futures in the Australian economy, emphasizing its contribution to profits and government revenues.

In the fiscal year 2024, iron ore economic profit from major mining companies BHP Group Ltd ADR (NYSE:BHP), Rio Tinto ADR (NYSE:RIO), and Fortescue Metals Group Ltd (ASX:FMG) was approximately A$36 billion. This figure represents a substantial portion of the total economic profit from Citi's Australian mining coverage, which stood at around A$39 billion.

"Although there is near-term iron cost curve support, we see longer-term downside risk as the curve can reshape considerably on materially lower China demand," it is said in the report.

The report also noted the near-term support for iron ore prices due to the cost curve. When iron ore prices are high, China's imports from countries other than Australia, Brazil, and South Africa tend to increase to about 20 million tons per month.

Conversely, when prices drop to the US$90-US$100 per ton range, these imports shrink to roughly 10 million tons per month. As of July, imports had fallen to approximately 14 million tons per month.

Looking at the long-term outlook, Citi pointed out challenges related to China's iron ore demand. The firm forecasts a stable per capita consumption of steel in China at around 660 kilograms per person in calendar years 2026 and 2027, followed by a gradual decline to approximately 560 kilograms by 2040 as urbanization rates mature.

Moreover, China's proportion of electric arc furnace (EAF) based steel production is expected to increase from around 10% in 2023 to 24% by 2040, while blast furnace-based steel production is projected to decrease from 918 million tons in 2023 to 624 million tons in 2040.

The peak in China's iron ore needs was in 2020 at 1.3 billion tons, with a predicted decrease to 1.1 billion tons by 2030 and 850 million tons by 2040.

Citi's strategists concluded that a reduction in China's demand could lower the top end of the global iron ore cost curve to about US$60 per ton, removing approximately 400 million tons per annum from the market.