China churned out a record 1.05 billion tonnes of crude steel in 2020, with demand boosted by Beijing’s stimulus measures for infrastructure such as bridges and roads and both new commercial and residential buildings.

But they added that, due to rising higher prices of imported scrap particularly in local markets and that most steel mills use the oxygen and iron ore method of making steel, it is unlikely that Chinese steel mills will be quickly replacing large amounts of imported iron ore with scrap steel in the short term. The other factor preventing scrap steel from becoming a fast replacement for iron ore is the small size of the global scrap market.

The bottom line is that there are currently no viable alternatives to iron ore, and China’s main pathways to diversifying its iron ore supply – by using more scrap steel, opening new mines overseas, finding new import sources and increasing domestic production of iron ore – are riddled with obstacles that will take years to overcome.

China’s forecast steel output for 2021 is a whopping 1.065 billion tonnes, according to the Metallurgical Industry Planning and Research Institute, up 1.4 per cent on actual output from a year earlier.

Where does China get its iron ore from?

Australia and Brazil, the world’s two largest iron ore producers, are far and away China’s top suppliers.

Meanwhile, Australian shipments rose 7 per cent to 713 million tonnes last year, while Brazilian supplies were up 3.5 per cent at 235.7 million tonnes, data from China’s General Administration of Customs showed.

Tang Chuanlin, an analyst with Citic Securities, said in January that Australia and Brazil still could not meet China’s demand for iron ore. “Mills had to buy from other countries.”

Tang also noted that Chinese steel firms were using more low-grade ore, like India’s, as part of an effort to lower costs. Almost two-thirds of India’s iron ore exports to China had less than 58 per cent iron content, according to Indian mining industry estimates. India puts a 30 per cent export duty on ore with iron content above 58 per cent, to protect its domestic supply and steel industry.

Ores with iron content above 65 per cent are regarded as “high-grade”.

Questions about the reliability of India’s iron ore exports were laid bare in December when the Indian Steel Association called for an immediate six-month ban on iron ore exports, given soaring prices and a shortage of the product.

China has interests in overseas mines with abundant iron ore reserves, including in West Africa, yet most of it remains inaccessible amid bureaucratic wrangling and limited capital. There are plenty of raw materials to go around, but the key is extracting them economically.

Chinese state-owned enterprises have made deals involving parts of the world’s largest untapped iron ore deposit – the massive Simandou mine in West Africa’s Guinea – that boasts billions of tonnes of high-grade iron ore.

China has interests in both the northern and southern blocks of the reserve through companies Shandong Weiqiao and Aluminum Corp of China (Chinalco). But getting Simandou up and running requires the construction of new large-scale production facilities and transport infrastructure that will take time to build and whose construction is likely to run into problems like most big mining projects do, according to analysts.

And even if the mine does roar to life in the next few years, its maximum capacity of about 150 million tonnes a year would still be just a small portion of the global market share now dominated by Australia and Brazil.

This leaves China heavily dependent on its current suppliers of iron ore for the foreseeable future. Based on current contribution rates, Australia is likely to supply about 700 million to 800 million tonnes of iron ore to China this year, while Brazil will supply about 300 million tonnes.

What are the problems for China’s iron ore needs and its supply?

China’s domestic iron ore supply is relatively low-grade and expensive to process. Its mines are also being rapidly depleted. Thus, many Chinese steelmakers find it is cheaper and more efficient to use imported, high-grade iron ore to meet demand.

Minister for Industry and Information Technology Xiao Yaqing, at the 2021 National Industry and Information Work Conference in December, also asked the steel industry to “resolutely” reduce its output in 2021.

As the bulk of China’s iron ore supply is imported from Australia and Brazil – Australia supplies about 60 per cent of China’s iron ore – the souring relationship between Beijing and Canberra is adding concerns that bilateral iron ore trade could be disrupted. For now, the iron ore trade remains normal, and there is no sign that Beijing will restrict Australian iron ore imports.

The price of iron ore has been mainly pushed up by recovering profits for steelmaking in China and rising demand for steel products from the downstream manufacturing and construction sectors, as the Chinese economy recovers rapidly from the coronavirus.

Then there is the supply problem.

But Vale is performing under expectations due to a series of setbacks, including the Brumadinho dam collapse in early 2019 that killed over 250 people.

What is the iron ore outlook for China?

Analysts at the China Iron and Steel Association (CISA) have predicted that, over the next year, Chinese demand for iron ore will fall as the pandemic stimulus starts to wear off, steel mills cut back production due to poor profitably, and other non-Australian iron ore miners such as Brazil resume full production. This should lead to lower prices, they said, though they warned that strong iron ore derivatives trading could keep prices buoyant.

The CISA has urged Chinese authorities to look closely at market speculation in iron ore and consider changing market trading rules to avoid distortions.

Despite the worries about the impact of speculation, some analysts are confident that lower fundamental demand will lead to a correction in prices, especially as the construction of property and infrastructure in China slow down in the coming year, as they expect.

The Australia government’s Office of the Chief Economist, in its energy and resources quarterly outlook for December, said it expects prices to fall only gradually in the coming months, especially with iron ore production outside Australia, including Brazil, still facing curbs.

It is forecasting that prices will remain above US$100 a tonne until mid-2021, before falling to around US$75 by the end of 2022 as the Brazilian supply recovers and Chinese economic stimulus eases back.

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