Seaborne Iron Ore Market Softens

A healthy project pipeline will, however, help offset depleting resources and balance the market

By Anton Löf and Olof Löf

Despite the COVID-19 pandemic, world crude steel production in 2020 grew to 1.878 billion metric tons (mt), according to the World Steel Association (WSA), a new global all-time high. This is the fifth consecutive year of growth.

As in the previous year, there were significant differences across regions. Chinese crude steel production increased by 69 million mt in 2020, an increase of 7%, compared to an increase by 8.3% in 2019. At 1.065 billion mt, China continues to be, by far, the largest producing country, accounting for 57% of total crude steel produced. India, the second largest producer with an output of 100 million mt of crude steel in 2020, only accounts for 5.3% of global steel production. There are six countries with national production of more than 50 million mt of crude steel in 2020 (see Table 1).

According to the OECD, global steelmaking capacity increased in 2020 by 38 million mt. The current global steelmaking capacity at the end of 2020 is 2.453 billion mt. This represents an increase of around 1.6% from 2019 figures. Most of the capacity additions were in Asia, where an additional 29 million mt of capacity came on stream. China, in actual capacity, reached its peak in steel production in 2016, though the country added some 7.6 million mt net in capacity during 2020. Also, companies in the Middle East (7.2 million mt) and North America (3.2 million mt) added new capacity. From a growth perspective, the Middle East grew by 9.1%, North America, 2.1%, and Asia, 1.8%. Europe and Latin America saw decreasing capacity while others had minor growth or no growth.

There are several projects that will potentially add steelmaking capacity over the years 2021-2023. According to the OECD’s Latest Developments in Steelmaking Capacity 2021, some 45 million mt of steelmaking capacity is under construction. While an additional 69 million mt is in the planning stage for a possible startup sometime prior to 2023.

Global exports of finished and semi-finished steel products fell in 2019 to 382 million mt. This represents the fourth year of consecutive decreases in trade of steel from the peak in 2016 at 467 million mt. China is the main exporter with 51 million mt or 13% of total exports. EU exported a total of 119 million mt of which 23 million mt was sold outside the EU. Other major exporting countries are the Russian Federation, 32 million mt; Japan, 30 million mt; and South Korea, 28 million mt.

Steel prices have seen a downward trend since early 2018 until the second half of 2020, when prices increased sharply. The average price of steel over 2020 was, however, quite low, as many regions experienced weak demand. Flat and long steel prices were on average 3% lower in 2020 compared to 2019. Prices for the key steelmaking raw materials (iron ore, coking coal and scrap) also increased dramatically during the second half of 2020. Thus, the margin between steel and raw materials prices decreased over the first half of the year, but started to increase around the third quarter of 2020. Compared to historical figures for the last six years, the margin is continuously at a low level according to the OECD.

Iron Ore Production

Global output of iron ore decreased by 1.9% to 2.343 billion mt in 2020 (see Figure 1 and Table 2). Australia is the most important producing country, mining 39% of all iron ore globally. Brazil, the second most important country, accounts for 17%, and China, the third largest producer, for 12%. Together, the three leading countries account for 67% of total production.

During 2020, Australia increased its iron ore output to 922 million mt.¹

Brazilian production decreased by 1.5% reaching 391 million mt. Brazil has struggled to increase its production amidst COVID-19 restrictions and problems related to tailings dam failures. The country has not reached above its 2017 peak.

In Asia, the larger producing countries are in order: China, India and Iran. All other countries produce less than 10 million mt. Crude ore output in China reached 867 million mt, up 2.7% compared to 2019. This is, however, far from the peak of 1.592 billion mt reached in 2014. The reported crude ore production in China is of such low Fe grade compared to seaborne traded iron ore that comparison does not make any sense.

Many Chinese iron ore miners are very small and not at all capital intensive and are responsive to higher prices and quick to restart, shut down and mothball mines.

Indian iron ore production decreased by 12% and reached 204 million mt. Output in Iran decreased by 12% to 54 million mt.

In Europe, including Russia, Ukraine and Kazakhstan, production increased by 1.3% in 2020, up to 244 million mt.

African production increased, up 1.9% at 93 million mt. In South Africa, production decreased by 2.1% reaching 69 million mt, while in Mauritania, production increased by 10% reaching 13 million mt.

During the last decade, with the exceptional increase in production from Australia and falling production in China, the share of iron ore being produced by low- and mid-income countries (developing) has declined from top levels at 73% in 2007 to 54% in 2020. This is a decline compared to last year and the fifth year of consecutive decline of the share of production coming from developed countries.

Iron Ore Trade

After two years of falling trade, global iron ore exports increased by 3.6% in 2020. World total iron ore exports have increased roughly 41% during the past 10 years and amounted to 1.6 billion mt in 2020 compared to 1.544 billion mt in 2019 (see Figure 2).

Australia is by far the largest exporter of iron ore with a market share of 54%, the same as last year. Exports from Australia continued to increase during 2020, reaching 869 million mt, up 4%. The second largest exporter, Brazil, has a market share of 21%, a decrease of two percentage points compared to 2019. Brazilian exports fell by 2.7% in 2020 and reached 341 million mt. This is the second year of falling exports from Brazil, however, most indicators point toward increased export in 2021.

South Africa, the third-largest exporting country, shipped 65 million mt of iron ore in 2020. Canada and India follow with 54 million mt and 52 million mt, respectively. Together, the five most important iron ore exporting countries accounted for 86% of total exports in 2020. While the market concentration of the five largest exporting countries has decreased over the last years, it is still relatively high, at its peak in 2015 it was 89%.

Among the larger exporting countries, India’s exports increased the most, by 67% in 2020 reaching 52 million mt. Indian exports have fluctuated widely over the last couple of years. In 2015, exports were down to 4.2 million mt. At the same time, imports were increasing. In 2020, imports were down to 700,000 mt. India seemed to be on its way to become a net importer of iron ore, but now it may produce enough iron ore to satisfy both an increase in exports and the domestic steel industry.

China alone accounts for 74% of global iron ore imports in 2020. The country’s imports increased 9.5%, reaching 1.170 billion mt, a new all-time high. Chinese import dependency is currently 83%, an all-time high. This means that Chinese import dependency has increased uninterruptedly since 2011. However, in the coming years, Chinese demand for and dependency on iron ore imports could decline.

The second largest importer of iron ore is Japan with 99 million mt. Together, the five largest importing countries account for 88% of the market.

Seaborne iron ore trade in 2020 increased by 4.5%, up 68 million mt, to 1.547 billion mt.

Global production of iron ore pellets in 2020 decreased to 524 million mt, down 4.5% compared to 2019. Exports of pellets also fell in 2020 reaching 132 million mt, down 4.8%. The largest iron ore pellet exporters are in order: Sweden, Canada, Ukraine, Brazil and India.

The share of pellets in total iron ore production has declined since the late 1990s when it ranged between 26%-27%. During the last couple of years, the share of production has increased from a low of 19% in 2016 to 23% in 2019, however, 2020 saw a decrease to 22%. The Mariana dam failure and the subsequent closure of the Samarco production units have underlined the sensitivity of pellet demand to world market conditions and prices.

Iron Ore Prices

2020 started off on a weak note and the iron ore price (the discussion in the following chapter revolves around 62% Fe fines delivered in China unless otherwise stated) fell toward $80/mt in early April. However, by early May, prices took off and continued to rise through the year reaching its peak at the last trading day of the year (See Figure 3).

During 2020, demand of iron ore contracted by 0.9%. However, this was far less than anticipated. In Brazil, production was temporarily halted at a number of mines while Vale decharacterized tailings storage facilities. At the same time, the other big producers had problems reaching capacities and delivering enough volumes.

As a result, the total combined production of Vale, Rio Tinto, BHP, FMG and Anglo American fell by 3.6% during 2020. This pushed the iron ore price up during the second half of 2020. The margins for Chinese steel plants increased during the same time and they could also afford higher prices. The price at year end was $156/mt, an increase from the start of the year of 70%. The average price over 2020 was $107/mt, an increase from 2019 by 16%.

During 2021, prices have so far gone through three distinct periods. At the start of the year, while much the same logic applied to the market as for the end of 2020, the situation stabilized, and prices flattened out from early January but stayed high. Between January 1 and April 30, the average price was $168/mt. In the beginning of May, the price increased sharply and rose above $200/mt on May 7. During the next three months, the price hovered between $200/mt-$220/mt reaching a peak on July 16 at $220/mt.

The price increase was triggered by the recovery in the global economy as supply could not keep up with the strong demand from China. However, on the first trading day of August, the price dropped 15%. Weaker demand from China, where local steel producers preferred drawing down stocks as far as possible rather than buying seaborn traded iron as production restrictions set in, has made the price continue to fall. At the end of November, iron ore prices were approaching $100/mt, a 36% decline from the beginning of the year.

The price premium for high-quality iron ore was subdued and relatively stable during 2020. However, in 2021, it increased during much of the year. The spread between 65% Fe fines and 62% Fe fines delivered in China reached more than $80/mt, a record, in July. Since then, it has come down with other iron ore prices.

Project Pipeline

Currently, there are several iron ore projects in the pipeline following the increased iron ore price of the last three years. Not all projects will increase overall iron ore production capacity as of them is primarily designed to maintain volumes as resources are depleted. What follows are some of the more important projects. It’s important to note that most of the capacity additions in the short to mid-term will come from incremental increase in production from the two largest production areas, Western Australia and Brazil.

In Brazil, during December 2019, Vale completed the physical works and startup of the CLN S11D project, the infrastructure project to support the S11D mine and the Northern System. Until 2022, the project will be in a ramp-up phase. This means the S11D mine that was completed in late 2016 now has reached full production capacity. Vale’s total production capacity in September 2020 was 318 million mt/y. In September 2021, this increased to 335 million mt/y. The company also plans to increase production another 10 million mt/y within the Northern System. As of the end of the second quarter of 2021, the project is 80% complete and is expected to be finalized by the second half of 2022. Vale targets capacity of 400 million mt/y in the medium term by increasing production across operations through debottlenecking and restart of temporarily closed operations. For the long term, Vale envisions a capacity of 450 million mt/y. There are currently two projects in the pipeline to realize this vision: Capanema and Serra Sul, 120 million mt/y. Capanema will add 14 million mt/y capacity at the Timbopeba site, and it is estimated to be completed in the second half of 2023 at a total cost of $495 million. As of the end of the second quarter of 2021, the project has just begun. Serra Sul’s 120 million mt/y consists of increasing the S11D mine-plant capacity by 20 million mt/y at a cost of $1.502 billion. As of the end of the second quarter of 2021, this project as well has just started, and it is expected to be finalized by the second half of 2024.

In Australia, iron ore projects account for A$4.10-$5.10 billion of potential investment expenditure according to the office of the chief economist in late December 2020. There are currently six committed projects with an investment total of A$1.240 billion, all located in Western Australia. At the feasibility stage, there are 10 projects with a potential investment value between A$1.4-$12 billion and another 15 that has been publicly announced at a cost of A$1.4-$1.8 billion. However, during 2020, only one project was completed, at an investment of A$100 million. Exploration expenditure for iron ore increased by 12% in 2019-2020 and reached A$361 million, a similar growth rate as last year. At its peak in 2011-2012, exploration expenditure was A$1.2 billion, while far from those numbers exploration expenditure is still the highest in the past five years.

At Rio Tinto’s Gudai-Darri (Koodaideri) project, mining has commenced. First ore in the crusher is expected during 2021, though the project has been delayed compared to the initial plan. Ramp up is planned for 2022 reaching full capacity in 2023 and the project will have a capacity of 43 million mt/y. All of Rio Tinto’s Australian investments are related to sustain current production capacities in the Pilbara region.

Fortescue Metals Group achieved first production at the Eliwana project during the financial year of 2021. The Iron Bridge magnetite project, co-owned by FMG (69%) and Formosa Steel, is also progressing. In May 2021, the technical and commercial assessment was completed and the project is estimated to cost $3.3-$3.5 billion and have a capacity of 22 million mt/y of high-grade (67% Fe) iron ore. The estimated start of operations is December 2022 with a ramp-up period of 12-18 months.

BHP reached first production in May 2021 from its South Flank project, which officially completed 85%. The project, with a capital expenditure of $3.061 billion, is scheduled to ramp up over three years and have a capacity of 80 million mt/y. The high-quality ore will increase the average grade delivered from BHPs Western Australian iron ore mines from 61% Fe to 62% Fe as well as increase the portion of lump being delivered from 25% toward 30%-33%.

In Ukraine, Ferrexpo is undertaking investments to grow production capacity to 12 million mt/y. Further into the future, the company plans to increase overall production and increase the share of products in the DR grade (67% Fe) pellet bracket. The company is planning for an increase in concentrator capacity from 30-35 million mt/y of raw ore processing to 50 million mt/y.

In Africa, projects are slowly being revitalized. In Guinea Simandou, one of the world’s largest undeveloped projects is slowly moving forward. Rio Tinto, the owner of the Simandou Blocks 3 and 4, is moving ahead with its project analyzing product test samples and reviews the result of the infrastructure studies while a new office in Conakry has been established and the in-country team is expanded. However, no timelines are discussed. During late 2019, Simandou Blocks 1 and 2 were auctioned. The winning bid came from the SMB-Winning consortium, formed by the Singaporean shipowner Winning Shipping, the Chinese aluminum producer Shandong Weiqiao, the Yantai Port group as well as the Guinean transport and logistics company United Mining Supply. The SMB-Winning group is currently mining bauxite in Guinea, however, since the military coup in early September 2021, the political landscape has changed, and it is unclear what will be the results. The initial plan was to commence iron ore production by 2025 and the mine would produce somewhere around 60 million to 80 million mt/y. Close by, on the border to Liberia are the Zogota and Nimba projects. The Nimba project is operated by High Power Exploration and the company is planning to bring a starter mine with the capacity of 1 million to 5 million mt/y into production as quickly as possible while completing feasibility studies for an operation of at least 20 million mt/y. All the projects in Guinea are located in the mountainous region in the interior of the country and demand construction of a new railway, a quite complicated infrastructural project.

In the Republic of the Congo, the Zanaga project, a joint venture between Zanaga Iron Ore and Glencore, is continuing. The mine is projected to produce 12 million mt/y in a first stage and raising output to 30 million mt/y in a second stage. Multiple early production scenarios are also under consideration. The project announced an updated cost estimate in May 2021, no timeline has been presented. Glencore is further involved in Mauritania, but no definite plans have been communicated. Also, in the Republic of the Congo, the local company Sapro group exported its first tonnages in the first quarter of 2019. The company had plans to produce 12 million mt/y for export, mainly to China, but total export of the Republic of the Congo did not amount to more than 28,000 mt in 2020, according to Chinese import statistics.

In South Africa, Kumba announced a ZAR 7 billion ($424 million) investment into the Kapstevel South project at the Kolomela mine. The project will contribute to sustaining production at 13 million mt/y for the remaining life of mine.

In Canada, Champion Iron took the decision to go ahead with its Bloom Lake expansion project phase II in late 2020. The project will double production capacity at the Bloom Lake mine to 15 million mt/y.

As the steel industry is increasing its investment into green steel technology and countries in general are moving toward stricter environmental regulation and the industry face increased costs for CO₂ emissions, demand for higher grade iron ore should increase along with pellets. This would favor projects catering toward this market segment. At present, it is too early to draw any definite conclusions but there are a fair number of projects in the pipeline that is supposed to increase the overall average grade of sold product. Further, there seems to be a new interest in magnetite projects supposed to deliver a high-grade concentrate for the production of pellets.

Corporate Concentration

Corporate concentration in the iron ore industry has remained fairly constant over the last couple of years. In 2020, the 10 largest iron ore companies controlled 59% of global production, one percentage point more than in 2019 (see Table 3). In establishing corporate concentration, production is attributed to a controlling company. This figure may differ from total mine production as certain operations are joint ventures and thus attributed to two or more companies depending on the defined control of the mine.

Vale, the Brazilian mining giant, has struggled to maintain production volumes as a result of COVID-19 and the two Brazilian dam disasters. Despite this, and a reduced output from 302 million mt in 2019 to 300 million mt in 2020, the company remains the world’s largest iron ore producer. Vale’s market share increased marginally to 13% in 2020, the peak was reached already in 2007 at 19%. All of Vale’s mines are located in Brazil.

The market share of BHP remained 12% and controlled production reached 288 million mt in 2020, up from 272 million mt in 2019. This was enough to regain the position as the second-largest iron ore producer, which the company lost to Rio Tinto in 2016. However, at a mere 2 million mt more than its rival Rio Tinto, the two companies can be argued to share second place. All of BHP’s mines are in Western Australia except for the Samarco joint venture in Brazil together with Vale (50/50), which has not been producing since 2015.

Rio Tinto, the third-largest iron ore miner controlled 286 million mt of production in 2020, up from 281 million mt the year before. Rio Tinto has a market share of 12%, the same as 2019. Most of Rio Tinto’s mines are located in the Pilbara region in Australia, in addition the company controls the Iron Ore Co. of Canada with mines in Labrador.

The production of Fortescue Metals Group (FMG) declined slightly in 2020 (177 million mt) compared to 2019 (183 million mt). All of the company’s mines are located in Western Australia. FMG’s share of total world production in 2020 was 7.6% down from 7.7% in 2019.

Hancock Prospecting, the privately owned emerging Australian iron ore giant, controlled by Gina Rinehart, has grown rapidly during the last couple of years. The company owns the Roy Hill mine (100%) and the Hope Downs mine in a JV with Rio Tinto. Both mines are located in Western Australia. In December 2018, Hancock acquired the Australian miner Atlas Iron to further boost its iron ore production. Production began in 2016 at the Roy Hill mine and Hancock has rapidly become the fifth-largest iron ore miner in the world, with a market share of 3.8% in 2020.

The measurement of corporate control at the production stage underestimates the real concentration of the iron ore sector. The corporate concentration, if measured by the share of global seaborne trade, is considerably higher. Vale alone controls 19% of the total world market for seaborne iron ore trade, and the three largest companies, in 2020, controlled 57%, a slight decrease from 58% in 2019. Among the top 10 producers, the six largest sell almost all their iron ore on the open market, the other four all produce steel from a large proportion of their iron ore production. These top six accounted for 78% of the market in 2020, down from 80% in 2019.

In the longer term, however, Vale is on track to restart closed down operations, should the company be able to reach its old production figures of 2018, a reversal of the decline in the two last years will materialize. Considering that Vale is planning for a 400- to 450-million-mt/y capacity, a future scenario with a higher corporate concentration is highly likely.

For many years, the industry was dominated by the top three producers, the “big three” (Vale, BHP Billiton and Rio Tinto). However, since FMG started production, this group has decidedly increased and there is reason to talk about the “big four.” These four all produce more than 150 million mt/y. Discussing those companies that cater to the export market, there is a middle section consisting of Hancock Prospecting (Roy Hill) and Anglo American. Below, there are a number of companies producing between 20-40 million mt/y, examples include CSN, Cliffs, LKAB, Metinvest, Metalloinvest, etc. Hancock Prospecting has increased production capacity swiftly since the opening of the Roy Hill mine. While there is still some way before there are talks about the “big five,” this certainly seems to be the strategy of Hancock Prospecting.

Market Outlook

Global economic growth in 2020 fell 3.2%, according to the IMF July World Economic Outlook. Projections by the IMF is for a 6% growth in 2021 followed by a 4.9% growth in 2022. This is a more positive forecast compared to the April outlook. In the latest version, prospects for emerging markets and developing economies have been revised down while the forecast for advanced economies has been marked up.

During 2020, world crude steel production increased modestly with 0.2%, according to the WSA. For the first eight months of 2021, global steel production increased 4.8% compared to the same period the previous year. China alone accounts for 66% of crude steel production globally in the first eight months of 2021. This is considerably higher than the corresponding figure of 57% for 2020. According to the National Bureau of Statistics of China, the growth in domestic steel production during the first eight months of 2021 was 5.3%. However, toward the end of 2020, the Chinese Ministry of Industry and Information Technology (MIIT) communicated that the Chinese steel industry should produce less in 2021 than it did in 2020. But out of China’s four largest steel-producing provinces, only Hebei has actually decreased its production. Chinese production generally tapers off during the winter months with governmental restrictions on emissions. This year might see a more drastic slowdown than the industry is used to. Should China manage the set goals, on average a 9.5% lower production per month compared with the same month a year earlier is needed for the period September-December. On a global scale, should the rest of the world continue its growth path, this would mean a growth of total steel produced in 2021, but production would slow down some 2.4% in the last four months compared to the first eight.

The WSA’s Short Range Outlook April 2021 for world steel use anticipates an increase in world steel demand by 5.8% in 2021, followed by a further increase of 2.7% in 2022. China, on which so much depends, is forecast to increase its steel demand by 3% in 2021 and by 1% in 2021. This would put Chinese demand 2021 for finished steel products at 1.025 billion mt, this can be compared to the production of crude steel, which was 1.065 billion mt in 2019. In 2020, China exported some 51 million mt of steel products. Reducing exports would give some room for growth in demand even with limited, or even no growth in steel production.

China’s move toward a lower GDP growth with a society where consumption rather than investments is the driving force of economic activities should negatively impact the growth potential for steel demand. GDP growth in China, according to the World Bank, was a mere 2.3% in 2020, while this might be more attributed to COVID-19 restriction rather than a long-term trend, GDP growth has continuously fallen since 2010. Further, globally, the scrap share of the steel burden is increasing, according to the Bureau of international Recycling, as more and more steel becomes available for recycling. Analyzing the numbers from the National Bureau of Statistics of China, this trend is increasing rapidly locally in China. No doubt this will limit the demand growth for virgin units of iron ore into the future.

For the first six months of 2021, 12 major companies, which reported quarterly figures, produced 646 million mt of iron ore (see Table 4). This represents an increase of 3.6% compared to the same period in 2020. Among the large companies, Vale shows the largest increase, in absolute numbers with 17 million mt, up 13%. BHP Billiton and Rio Tinto reduced their production; the former with 1.3% and the latter with 4.7%. CSN, another Brazilian miner, increased production by 41% in the first half of 2021. As a result, Brazilian exports for January-August 2021 increased 5% compared to the same period in 2020. Chinese imports during the period January-August 2021 decreased by 1.2% compared to the same period in 2020. Chinese imports, for the first eight months, were 747 million mt, on an annualized rate this would be equal to 1.121 billion mt. Demand for iron ore from the steel sector in the first eight months of 2021 also pointed in this direction, up 4.8%. As need for iron ore has increased, more than the top six iron ore producers have managed to deliver. It seems reasonable to assume that corporate concentration in 2021 will go down slightly.

Iron ore demand, measured as the combined global total production of pig iron and DRI, during the first eight months of 2021 increased 5.5% compared to the same period the year before. As a result, the market has continued to be tight during the first half of 2021 and prices have stayed high.

There is no indication of falling supply of iron ore toward the end of the year and into 2022. On the contrary, post COVID-19, the mining companies are ramping up where restrictions hampered production earlier. On top of this, Samarco, the Brazilian company that closed down because one of the dam catastrophes, is producing again. Further, high prices have spurred increased output by swing producers. With the policy of a limited steel production in China, iron ore prices have already fallen. Depending on how the Chinese government reason for 2022, iron ore prices will be considerably lower than in 2021. At the root is the Chinese government’s fight against local environmental problems. While steel, and jobs are needed locally, centrally, China will continue to push for cleaner and more efficient production. With a combination of a modernization of the steel industry (well on its way), economies of scale and a higher use of scrap in combination with a bigger share of the blast furnace burden being higher grade iron ores and pellets, the demand for steel can be satisfied with decreasing environmental impacts from the industry. Not to mention the prospect of hydrogen steel production; also China is investing in steel production with reduced carbon footprint.

However, the iron ore price is a reflection on supply and demand and late 2021 and into 2022 most factors point toward a higher supply than demand. Thus, iron ore prices will, most likely, be weak in the coming year. However, the potential of oversupply is manageable and Chinese production, as potentially other swing producers, will likely reduce capacity somewhat with falling prices. Thus, the extreme case with a flooded market and very low prices is less probable.

But there are differences between iron ores. Since there are environmental considerations to take into account, higher-grade ores and other products, like pellets, that have less environmental impact at the steel plant might see a higher demand compared to lower grade fines. The iron ore market might split into two segments, high grade ores and products, and lower grade fines products. These two markets may display contradictory trajectories for supply, demand and price.

Anton Löf and Olof Löf are with RMG Consulting, an independent consultancy based in Stockholm, Sweden. For more information, contact Anton Löf at anton.lof@rmgconsulting.org.