Monsters of Rock: How far will Chinese steel production fall this year?

News.com.au

19 hours ago

Indicators in China's steel market continue to look bearish
But prices could remain propped above US$90/t
Argonaut initiates on swag bag of rare earths stocks
It's a germane question for Aussie investors and tax collectors.
How far China's can steel sector continue at current levels with the mouldy stench of a downturned property market? There's pressure also in other sectors that have been picking up the slack.
That's not to say steel production is about to fall off a cliff. But calls from quasi-independent state linked bodies like the China Iron and Steel Association suggest moves could be afoot to start clamping down on lossmaking steel and auto supply.
Echoing statements from similar bodies in the vehicle sector, where competition has stirred a price war that has left most carmakers losing money, the CISA has called on steel and carmakers to resist "neijuan".
It's a fun term since, according to MySteel, it's been newly-coined in the always lyrical Communist Chinese dictionary, defined as "describing hyper-competition and the relentless rat race".
Relentless cost-cutting has seen carmakers request markdowns of up to 10% on their steel prices, CISA warns, with auto profit margins shrinking from 7.3% to just 3.8% from 2018-2024.
The CISA forecasts steel production will decline 4% this year in China, the world's largest steel producer churning out around 1Btpa, and therefore the largest customer by the length of the straight for Aussie iron ore.
That would be the largest decline in any calendar year since at least 1990, according to analysis this week from Commbank's mining expert Vivek Dhar.
Last year Chinese steel output hit a five-year low after a 1.7% dive, but still crossed 1Bt for the fifth straight season at 1.005Bt.
MySteel reports showed late May crude steel production was down 12.7% on the same period in 2024, while iron ore imports have declined 5.2% to 486.4Mt over the first five months of the year – that's despite miners in the Pilbara shipping lower grades. S&P's Platts division, the main provider of iron ore index pricing, this week announced plans to introduce 61% Fe pricing from January next year, following the launch of a similar index by Fastmarkets.
That comes as new supply looms from Africa, notably the 120Mtpa Simandou project in Guinea.
Upside potential
Despite all that, Dhar remains confident iron ore will stay above US$90/t.
"We think it will be challenging for iron ore prices to sustainably fall to $US90/t even if China's demand deteriorates given such a level would require China's steel output to contract 6â€'7%/yr," he said.
"This is due to the highâ€'cost iron ore supply that would need to exit the market at $US90/t. For context, the most that China's steel output has contracted in any calendar year since at least 1990 is ~3%.
"We see iron ore prices averaging $US95/t in H2 2025, with upside risks tied to the size and composition of Chinese stimulus."
Amid trade uncertainty and concerns over the sustainability of the Chinese steel sector and broader economy, the big iron ore players have had a rough 2025.
BHP (ASX:BHP) is down 4% YTD, Fortescue (ASX:FMG) with its volatile green energy business is off close to 17% and Rio Tinto (ASX:RIO) has shed 9%. High grade Canadian producer Champion Iron (ASX:CIA) has been hit even harder, down a testy 29%.
Brazil's Vale, on the other hand, is an outlier, gaining 7.5%, with $211m capped Fenix Resources (ASX:FEX), a small Mid West producer with growth ambitions, up 7.7%.
Mid-tiers Grange Resources (ASX:GRR) and Mount Gibson Iron (ASX:MGX) are both significantly in the red, though the focus of the latter is squarely on how it uses its cash pile from the waning Koolan Island mine to charter a move into a new operation or commodity via M&A.
Singapore iron ore futures are down 0.62% to US$93.95/t on Friday.
Rarer than hen's teeth
A major move from Perth broker Argonaut this week, initiating coverage on a swag bag of rare earths stocks.
One, of course, is Lynas (ASX:LYC), the largest producer outside China via its world class Mt Weld mine near Laverton in WA.
"LYC boasts a strong strategic position as being a large ex-China rare earths producer and is benefitting from current trends in critical mineral supply security and potential market bifurcation. LYC is expanding, with its NdPr capacity lifting to 10.5ktpa, which could potentially grow to 12.0ktpa with the build of the US plant," Argonaut's Jon Scholtz said.
He's started the firm with a hold and $7.50 price target, a negative return of 13% – too much of the strategic angle (market bifuraction, Trump v Xi, West v China etc.) is already priced into Lynas, with the implied NdPr price in its share of US$100/kg some 80% above spot.
Scholtz is more bullish on Iluka Resources (ASX:ILU), opening coverage at a $5.50 PT (50% upside) with a buy rating.
The logic is that only its longstanding mineral sands business is priced in, ahead of the construction of the Federal Government supported Eneabba rare earths refinery, while a 20% holding in royalty company Deterra Royalties (ASX:DRR) continues to support ILU's dividend.
"The (refinery) positions ILU has a strong strategic player and could see it become a significant rare earth producer ex-China, benefitting from current trends in critical mineral supply security and potential market bifurcation," Scholtz says.
Spec buy ratings have also been dropped by George Ross on Brazilian players Meteoric Resources (ASX:MEI) and Brazilian Rare Earths (ASX:BRE).
MEI, the owner of the Caldeira ionic clay rare earths project in Minas Gerais, one of a handful of projects Ross says is likely profitable at current rare earths prices, has been initiated at a 22c price target (compared to 14c today), while BRE with its Rocha da Rocha REE and bauxite project has been initiated at a $4.20 PT.
It's up 6.3% this morn, while MEI was up slightly after announcing its selection in a Brazilian Development Bank (BNDES) funding initiative.
The ASX 300 Metals and Mining index fell 0.24% over the past week.
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