The Future of Iron Ore: Why 2025 Could Be a Pivotal Year for Australia's Iron Ore Industry

Highlights:

- Australia is the largest iron ore producer, accounting for over 36% of global production.

- China's construction industry sees a 22% decline, impacting global iron ore demand.

- Investing in top ASX iron ore miners, such as BHP, Rio Tinto, and Fortescue, could offer potential high returns in the long term. 

- Iron ore remains critical for global steel production, crucial for the clean energy transition.

- Australia's iron ore exports are projected to grow at a compound annual growth rate (CAGR) of 4% between 2023-2027.

- 2025 is expected to be pivotal for Australia’s iron ore market, with significant project expansions.

Australia's Iron Ore Dominance and Emerging Threats

Australia is the world's largest iron ore producer, with output reaching 944.1 million tonnes in 2022. Western Australia is the cornerstone of this production, accounting for 98.9% of the total. The Pilbara region, with its rich hematite deposits, has been instrumental in establishing Australia as a global leader. However, the sector is facing multiple long-term threats that could impact its dominant position in the global market.

Key Factors Affecting Future Production

Simandou project in Guinea, Africa.

 (Source: Rio Tinto)

The Simandou project in Guinea, led by Rio Tinto and a consortium of Chinese developers, is poised to bring a significant amount of new iron ore supply online in the coming years. This influx is expected to contribute to a global oversupply, putting downward pressure on prices. At the same time, China's iron ore demand is declining as the country moves past peak steel demand and increases its recycling efforts. The shift to electric arc furnaces (EAFs), which use scrap steel rather than raw iron ore, will further reduce China's reliance on Australian iron ore imports.

China: Past Peak Steel and Iron Ore Demand

China has been a key driver of Australia's iron ore boom, importing 76% of globally traded iron ore. However, the Chinese steel industry has reached its peak, with demand now entering a phase of decline. The traditional blast furnace-basic oxygen furnace (BF-BOF) method, which consumes a significant amount of metallurgical coal, is being replaced by the cleaner and more efficient EAF process. By 2025, China aims to increase its steel production from EAFs to 15%, with further growth projected. This transition will reduce China's need for imported iron ore and metallurgical coal, both of which are major exports for Australia.

Impact on Global Iron Ore Market

The shift towards EAFs will reduce China's iron ore imports, and the increased focus on recycling will further diminish demand for new iron ore. While other Asian markets, such as India and Southeast Asia, were expected to fill this demand gap, the outlook is not as promising. India's steel production growth is slower than anticipated, and the country remains largely self-sufficient in iron ore. S&P Global analysis suggests that only a fraction of the anticipated new steel production capacity in these regions will be realized by 2030, leaving Australian exporters potentially disappointed.

Iron Ore Market Heading for Major Oversupply

As China's demand for iron ore wanes, global supply is set to increase significantly. Vale, a major producer in Brazil, plans to add 50 million tonnes of supply over the next two years. Additionally, Mineral Resources' Onslow project in Australia, which delivered its first ore ahead of schedule, will ramp up to 35 million tonnes per annum. However, the most significant new supply source is expected to come from the Simandou projects in Guinea. Production from Simandou is anticipated to start in the next 18 months, with output reaching 90 million tonnes per annum by 2028 and potentially 120 million tonnes shortly thereafter.

(Source: GlobalData)

Price Projections and Market Dynamics

This influx of new supply, coupled with declining demand from China, will likely result in a period of significant oversupply in the iron ore market. Macquarie Bank forecasts a surplus of 200 million tonnes over the 2026-2028 period. The excess supply is expected to drive iron ore prices down, with projections indicating prices could fall to the US$22s or even US$60s per tonne before the decade ends. Despite these challenges, large-scale producers like Rio Tinto, BHP, and Fortescue are expected to remain profitable, although Australia will face reduced revenues from its biggest export.

The Shift to Direct Reduction Iron (DRI) Technology

The global steel industry is undergoing a significant transformation as it moves towards decarbonization. The current pipeline of announced low-carbon steel projects includes nearly 100 million tonnes of new DRI capacity expected to come online by 2030. DRI plants can use green hydrogen instead of gas to produce low-emissions iron and steel, but they require higher-grade iron ore than what is typically produced in Australia.

Opportunities and Challenges for Australia

For Australia, this presents both challenges and opportunities. While the majority of Australian iron ore is currently below DR-grade, there is potential to shift production towards higher-grade magnetite ore. South Australia's new Green Iron and Steel Strategy and the federal government's Future Made in Australia agenda highlight the potential for Australia to produce 'green iron' using domestically produced green hydrogen. However, this requires careful planning and collaboration with major steelmaking nations to ensure there is a market for green iron exports.

Preparing for the Future

As Australia faces a changing global iron ore market, it is imperative to adapt its strategies to maintain its position as a leading exporter. The upcoming oversupply and technological shifts in steelmaking necessitate a reevaluation of Australia's iron ore sector. While the country has long relied on its natural resources, it is now time to consider what the future of iron ore mining should look like.

Investment in Technology and Infrastructure

Investing in technology and infrastructure to support the production of high-grade iron ore for DRI processes will be crucial. Additionally, establishing partnerships with countries like China, Japan, and South Korea to ensure a market for green iron could secure Australia's place in the emerging low-carbon economy. With the right strategies in place, Australia can continue to lead the world in iron ore production while transitioning towards sustainable mining practices.

Investment Opportunities in Australia's Iron Ore Industry

Australia's iron ore industry offers promising investment opportunities, particularly through established ASX-listed mining companies. The Australian Securities Exchange (ASX) hosts some of the world's top iron ore mining companies, providing potential high returns for investors in the long term. 

BHP Group (ASX: BHP) is a global mining giant, known for its extensive operations in the Pilbara region and consistent profitability. The company offers a solid dividend yield and focuses on clean energy transitions, making it a reliable investment choice. As the second-largest iron ore producer.

Rio Tinto (ASX: RIO) is recognized for its diverse mineral portfolio and innovative mining technologies, ensuring efficient and sustainable production. The company's focus on sustainability and efficient production makes it a reliable investment choice.

Fortescue Metals Group (ASX: FMG) has faced a notable decline in share prices, down more than 16% year-to-date. This decline can be attributed to market volatility and operational challenges, such as transitioning mining operations. Despite these setbacks, FMG's focus on green hydrogen and sustainability aligns with global trends, potentially driving long-term growth and recovery. FMG's robust resource base and innovative approaches position it well for future growth, and the current dip in prices is expected to be short-lived.

What’s next

The iron ore industry is at a crossroads, with 2025 poised to be a pivotal year. The combination of declining demand from China and new supply from emerging markets presents challenges, but also opportunities for innovation and growth. By focusing on sustainability, technological advancements, and strategic partnerships, Australia can navigate the changing landscape and remain a key player in the global iron ore market. With its rich resources and commitment to innovation, Australia is well-positioned to thrive in the face of these challenges and seize the opportunities that lie ahead.