Falling iron ore prices and weak Chinese growth have dealt a blow to Kumba Iron Ore’s share price, causing the miner to shed about R65bn in value over the past year as investors anticipate that persistent headwinds will push prices lower in the coming years.
Iron ore prices fell by more than a quarter last year as China’s economic slowdown and stagnant property sector weighed on the country’s steelmaking demand, weakening its iron ore consumption in turn.
Despite some positive indicators in the Chinese economy lately supporting some demand lift, iron ore inventories held at Chinese ports remain at elevated levels, and the country’s latest PMI and activity data suggests that construction remains the weakest performing sector of the economy.
A 3% uptick in iron ore prices since the start of this year has been underpinned by optimism that policy stimulus may stabilise China’s construction and property sectors, enabling a recovery in iron ore demand.
However, the stimulus-led boost that iron ore producers are pinning their hopes on is expected to drive only a temporary increase in demand, according to research group Capital Economics.
“We think that any stimulus-led boost will prove temporary and won’t prevent the slow-motion collapse of China’s troubled property sector over the coming years,” Capital Economics said in a recent note.
This means iron ore producers could see prices declining further, with iron ore forecast to fall from $100 to $85 per tonne by the end of this year, reaching $70 per tonne by the end of 2026.
China’s environmental goals pose an additional threat to iron ore demand, with steel producers potentially curbing output this year as the government cracks down on carbon emissions.
On top of including the steel sector in China’s Emissions Trading Scheme this year, the country is also looking to increase its use of electric arc furnaces (EAF), which use scrap steel rather than iron ore and coking coal. It aims for EAF projects to account for 15% of total crude steel production this year and 20% by 2030.
China’s steel also faces a poor external demand outlook as weak economic growth in Europe and Asia threatens to hamper global steel demand.
The problem is compounded by growing tension in steel trade. Europe’s carbon border adjustment mechanism (CBAM) could reduce the continent’s demand for Chinese-made steel, while US demand is threatened by Trump’s proposal for a 60% blanket tariff on Chinese-made goods and anti-dumping duties on Chinese-made steel products.
As domestic and external demand comes under pressure, iron ore’s robust supply also contributes to the downward pressure on prices, with major iron ore producers such as Vale expecting to increase output over the next few years.
Around 70% of global iron ore output costs an average of $50 per tonne or less to produce, meaning that miners tend to keep supply high even in the face of demand challenges.
This year will see additional low-cost supply entering the market as new mines in Australia and Africa come online, particularly the Simandou mine in Guinea, which will be the world’s largest mine for high-grade ore when it reaches full production in 2028.
In Kumba’s third quarter trading update, the miner assured investors that it was on track to deliver its full-year guidance of 35-million to 37-million tonnes after reporting a 3% quarter on quarter increase in output for the three months to end-September.
However, it warned that sales were expected to end the year closer to the lower end of its full-year guidance as Transnet’s logistics performance compounded the effects of low prices, with sales falling 6% in the third quarter.
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