Mine capital expenditure continues to improve, iron ore supply turning point will be reached
From the relationship between iron ore production cycle and mine capital expenditure cycle, the capital expenditure cycle is generally 3-5 years ahead of the production cycle. Combined with the changes in the capital expenditure of the four major mines, it can be seen that the capital expenditure of the four major mines has experienced three cycles since 2006, which are the continuous expansion cycle from 2006 to 2013, the contraction cycle from 2014 to 2017, and the maintenance and improvement cycle from 2018 to now. Due to the significant changes in the capital expenditure cycle of the four major mines, the supply of global iron ore has also experienced significant cyclical changes in the past 10 years.
After the capital expenditure expansion cycle from 2006 to 2013, the four major overseas mines experienced a large capacity expansion in 2015-2018. After the tailings dam accident of Brazil’s Vale in 2019, global iron ore supply entered a contraction phase. Since 2022, with the gradual recovery of Vale’s production capacity and the gradual commissioning of new projects in Australian mines, the global iron ore supply capacity has been significantly repaired.
Since 2018, with the continuous improvement of mine profits and cash flow, the investment willingness of mining enterprises has also been gradually improved. Since 2018, capital expenditure at the big four mines has steadily increased, notably Brazil’s Vale and Australia’s FMG. In this environment, we believe that iron ore supply will usher in a new slow expansion cycle over the next 3-5 years, and we are now at the beginning of this expansion cycle.
Compared with the four major mines to maintain an improved capex status, the current Chinese investment in mines in Australia and Africa has significantly increased. The Simandou project in Guinea, jointly developed by mining companies including Weiqiao Group, Rio Tinto Group and Chinalco, is considered to be the world’s largest undeveloped high-quality iron ore deposit, with an estimated 65 percent iron ore reserves of 2.4 billion tons. The project is expected to start production in 2025 with an annual capacity of 100 million tons. In addition, the Hardey iron ore project in Australia, jointly invested and developed by China’s Baowu and South Korea’s PoSCO, is expected to start production this year, with a capacity of 40 million tons/year after full production. The Western Slope project in Australia, jointly invested by Rio Tinto Group and China Baowu, is expected to be put into operation in 2025, with a full production capacity of 25 million tons/year. In addition, Chinese investment projects in Algeria, Africa, and local mining enterprises in Brazil and Australia will gradually put into production in the next 3-5 years. After the new mine project is put into operation in the future, the total new iron ore production capacity will reach 265 million tons/year.
Overall, with the substantial growth of capital expenditure in large mines in recent years, overseas iron ore production capacity will usher in a new round of growth cycle in the next 3-5 years.
“Cornerstone Program” to boost domestic production capacity
In January 2022, the China Iron and Steel Association proposed a “cornerstone plan” aimed at strengthening resource security, specifying the supply targets for scrap steel, domestic iron ore, and overseas iron ore in 2025, 2030, and 2035. It is expected that by 2025, the Cornerstone Plan will achieve China’s domestic iron ore production of 370 million tons, overseas production of 220 million tons, and scrap steel production of 300 million tons. From 2030 to 2035, domestic iron ore production will be stable at 400 million tons, the output of overseas equity mines will be stable at 400 million tons, and the output of scrap steel will be stable at 350 million tons.
Since 2020, with the continuous rise of iron ore prices, the gross profit margin of the iron ore mining industry has continued to rise, significantly higher than the profit level of other industries. The improvement of profits, superimposed “cornerstone plan” policy drive, domestic black metal mining industry investment has entered a stage of significant growth.
With the increase of domestic ferrous metal mine investment in the past two years, since 2023, the domestic iron ore supply capacity has significantly improved, from January to October, iron ore production of 826 million tons, an increase of 2%.
Looking forward to 2024, with the continued expansion of overseas mine capital expenditure, as well as the continuous promotion of the domestic “cornerstone plan”, the global iron ore supply is expected to usher in a new round of growth cycle in the next 3-5 years, and the inflection point of iron ore supply is gradually emerging. For domestic ore, we expect to continue the growth trend in 2024, with an increase of about 10 million tons. For imported ore, considering the background of a high base in 2023, it is expected that the growth trend will continue in 2024, but the growth rate will narrow, and the increment is expected to be about 5 million tons under the neutral scenario; In the optimistic scenario, the increment is expected to be about 10 million tons; In the pessimistic scenario, it is expected to fall by about 10 million tons.
[Demand enters a downward cycle]
“Double carbon” policy constraints, pig iron production gradually reduced
Since 2021, China has officially launched the implementation process of the “carbon peak and carbon neutrality” policy. The steel smelting industry, as the largest carbon emission industry among the 31 manufacturing categories, is facing pressure to reduce emissions. Data show that in 2021, China’s total carbon emissions reached 10.356 million tons, of which ferrous metal smelting and rolling industry carbon emissions reached 1.85 billion tons, accounting for nearly 17.9% of the total carbon emissions.
In order to achieve the goal of “carbon peak” in 2030 and “carbon neutrality” in 2060, the path that can be implemented has two main directions: one is to control pig iron production. Reducing production is an immediate way to reduce emissions. In 2021, China’s pig iron production will decrease from an increase to a decrease of 889 million tons in 2020 to 869 million tons; Carbon emissions from the steel smelting sector also fell, from 1.916 billion tons in 2020 to 1.85 billion tons. It can be seen that controlling pig iron production is the fastest path to achieve the goal of “carbon peak”. Second, change the mode of production. China’s iron and steel smelting is dominated by long process blast furnace, which is characterized by high energy consumption and large emission. In contrast, the short-process electric furnace with scrap steel as the main raw material and electricity as the main energy source, and the hydrogen smelting mode with hydrogen instead of carbon monoxide as the reducing agent for steelmaking, has low energy consumption and small emissions, and has obvious advantages in energy saving and emission reduction. At present, the proportion of electric furnace steelmaking in crude steel production in China is only 9%, while the proportion of electric furnace steelmaking in the United States and the European Union is 62% and 40%, respectively.
Recently, The State Council issued the “Action Plan for Continuous Improvement of Air Quality”, which mentioned that resolutely curb the blind construction of high energy consumption, high emission and low level projects; Prohibit new steel production capacity; Orderly guide the transformation of blast-converter long process steelmaking to electric furnace short process steelmaking; By 2025, the proportion of short-process steelmaking output should reach 15%. In the next two years, reducing carbon emissions in steel production through electric furnace steelmaking will also be one of the main ways.
It can be seen that driven by the “double carbon” policy goal, whether by reducing pig iron production or by changing the production process, there will be a significant downward trend in iron ore demand.
The advantage of hot metal is narrowed, and the substitution effect of scrap steel is improved
From January to October 2023, China’s crude steel output was 874.695,000 tons, an increase of 14.125 million tons, or 1.6%; From January to October, the national pig iron output was 744.748 million tons, an increase of 17.8556 million tons, an increase of 2.5%.
According to the crude steel and pig iron production data released by the National Bureau of Statistics, the increase in pig iron production is higher than that of crude steel. The above phenomenon is mainly due to the fact that the production cost of molten iron in the past two years is significantly better than that of scrap steel, which makes steel mills increase the proportion of pig iron production and control the overall production cost. Since the outbreak of the novel coronavirus pneumonia epidemic, the recycling and processing of domestic scrap steel has been affected to a certain extent, and the scrap industry has begun to implement new fiscal and tax policies, and the supply of scrap steel has encountered a bottleneck, and the supply and demand state has continued to be tight. In this environment, the price of scrap steel is relatively strong, and the cost is significantly higher than that of hot metal. Since the second half of 2021, the steel mill has gradually reduced the amount of scrap steel and controlled the overall production cost.
With the smooth flow of the scrap supply chain, and the phased impact of the new fiscal and tax policies on the scrap acquisition industry has been digested, we see that the scrap supply is in a state of gradual recovery. Since the fourth quarter of 2023, the average amount of steel scrap arriving and water storage in the steel mill has been in a state of continuous recovery. With the alleviation of the contradiction between supply and demand of scrap steel, the disadvantage of scrap steel cost has also been significantly improved, the cost advantage of scrap steel has emerged, and the substitution effect of scrap steel on hot metal has gradually emerged. The recent recovery of the capacity utilization rate of short-process electric furnaces and the decline of the capacity utilization rate of long-process blast furnaces is the embodiment of this effect.
Looking forward to 2024, with the continuous promotion of the “dual carbon” policy and the gradual improvement of the replacement effect of scrap steel, the downward cycle of iron ore demand is gradually becoming a reality. From the perspective of pig iron production, in the neutral scenario, it will be higher than the 2022 level and lower than the 2023 level, which is expected to be around 875 million tons; Under the optimistic scenario, it is expected to be the same as 2023, that is, near 890 million tons; In the pessimistic scenario, it is expected to be the same as 2022, that is, around 865 million tons.
[Attention to mine emergencies]
Based on the above analysis, we have summarized three scenarios for the iron ore supply and demand situation in 2024, which are neutral, optimistic and pessimistic. Based on the neutral assumption, the annual surplus of supply and demand is about 31.25 million tons; Based on optimistic assumptions, the annual surplus of supply and demand is about 16.5 million tons; Based on pessimistic assumptions, the annual supply and demand surplus is about 32.75 million tons. Overall, under the three expected assumptions, iron ore supply and demand show a relatively loose state.
Looking forward to 2024, with the gradual recovery of supply and the slow decline of demand, both ends of iron ore supply and demand will experience a process of transformation from quantitative change to qualitative change. In this environment, the situation of “strong mining and weak steel” caused by the mismatch of supply and demand cycles in the past few years is expected to be gradually reversed. For the price, the improvement of downstream demand is expected to still form a strong support and pull effect on the mine price, and once the downstream demand is expected to weaken signs or the contradiction between supply and demand of iron ore itself from balance to easing, iron ore prices are expected to show a trend decline. In terms of risks, concerns about mine emergencies and weaker than expected policy implementation.
