China’s housing market has been experiencing a downturn, but this has not significantly impacted the iron ore price, as the country’s steel mills have been directing their surplus output to export markets. This has contributed to what the OECD describes as a crisis of excess steel supply, leading to a challenging international trade environment.
Despite the positive impact on Australia’s budget, Western steel mills, including Bluescope Steel and the Whyalla Steelworks, are facing pressure due to the situation. China’s steel exports reached 90 million tonnes last year, marking a 36% increase from the previous year and the highest level since 2016. This surge in exports has intensified the ongoing steel excess capacity crisis, with the addition of 57 million tonnes of new capacity last year, the highest in a decade.
The OECD has expressed concerns about the bleak outlook for steel demand and the growing relocation of steel capacity from China to other regions, posing challenges for achieving steel decarbonization targets. This situation has significant implications for Australia’s economy, as every US$10 shift in the iron ore price translates to $2.5 billion in the Australian economy and $500 million for the federal budget, according to Treasury estimates.
Despite expectations of a drop in the iron ore price due to the housing downturn, the price has remained above US$130 since November, defying projections. China’s official figures indicated a collapse in steel production in December, but these numbers were met with skepticism. Analysts pointed out discrepancies, such as the absence of a corresponding fall in coke production and the lack of weakness in iron ore prices, which surged from US$105 a tonne in August to around US$135 a tonne throughout December.
The release of false steel production numbers may have been aimed at adhering to the 1 billion tonne limit set in China’s latest five-year plan, which came into effect in 2021. This commitment is linked to China’s pledge to cap carbon emissions by 2030 and achieve decarbonization goals.
