Material Matters: Steel, Iron Ore & Lithium

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A glance through the latest expert views and predictions about commodities: Steel demand for China's mega-dam; pending iron ore oversupply; temporary blip in lithium prices.

-China stimulus might be structurally more copper and aluminium intensive
-Structurally softer demand for iron ore? The debate is on
-Rio Tinto's Simandou project a case of bad timing?
-Lithium enthusiasm seems based on immaterial supply reduction

By Greg Peel

Chinese Infrastructure and Steel Demand

Over the past one to two weeks, China’s oversupplied commodity markets have experienced a notable rebound. This recent rally appears to be mainly driven by expectations of supply-side reform, Citi notes, targeting “anti-involution” and capacity reduction.

An American anthropologist described, in 1963, involution as “a greater input (an increase in labour) does not yield proportional output (more crops and innovation)”. A Chinese anthropologist has more recently described involution as “the experience of being locked in competition that one ultimately knows is meaningless. It is acceleration without a destination, progress without a purpose”.

Citi suggests the announcement of the planned 1.2trn yuan Yarlung Tsangpo hydropower project in Tibet reflects a renewed government focus on the execution –not just the planning of– major infrastructure projects. Positioned as potentially the largest hydropower station in the world, the project reminds the market of China’s historical reliance on infrastructure investment to stabilise growth.

Wilsons notes that earlier this week, the iron ore price rose to a four-month high of around US$104/t, having been rangebound between US$95-100/t this year, after China unveiled the hydropower project, which has provided a boost to an otherwise subdued outlook for materials demand. Separately, there are hopes Beijing’s continued efforts to curb excess capacity in the steel sector could improve mill margins and support raw materials pricing.

The construction timeline is long, Citi notes, and frontloaded demand is limited, implying any meaningful material usage will likely be spread over many years. The project is estimated to drive 6mt of steel consumption. Assuming it’s evenly spread out over a ten year consumption period, this project is expected to add 600kt steel demand per year.

it is still too early to say whether this mega infrastructure project marks the beginning of a broader infrastructure-driven stimulus, Citi ponders, likely focused on clean energy and the energy transition, or if China will announce more similar projects in the future.

These projects would likely differ markedly from the traditional iron-steel heavy infra stimulus model. The emphasis may shift towards energy transition or new production force related that are structurally more copper and aluminium intensive, Citi concludes.

Meanwhile…

The Pilbara Killer

The medium/long-term outlook for iron ore demand faces structural headwinds, Wilsons points out, including China’s housing oversupply and unfavourable demographic changes, which continue to be reflected in key economic indicators.

In China, manufacturing and steel PMIs (purchasing managers’ indices) have been below the 50 threshold –indicating contraction– for most of the past year. Meanwhile, steel production remains subdued, housing starts are down -20% year on year, and new home prices have been in a two-year downtrend.

The recent China Urban Work Conference marked a shift in urbanisation policy, with an emphasis on upgrading existing housing and infrastructure rather than building new cities, Wilsons reports. As upgrades typically require less steel than new construction, this shift points to structurally softer demand for iron ore.

And then there’s Rio Tinto’s ((RIO)) Simandou project in Guinea, which has been referred to as the “Pilbara Killer”, being the world’s largest and highest-grade undeveloped iron ore deposit. The project is set to materially increase global supply over the medium-term, with first production expected by the end of the current calendar year.

Divided into Simandou North and South, the asset contains an estimated four billion tonnes of recoverable ore, with planned production capacity of 120mtpa and grades of 65–67% Fe.

When the project reaches full capacity, expected around 2030, it is projected to account for 6-7% of global seaborne iron ore supply. This represents a substantial influx of new supply into an already oversupplied market.

The project’s high-grade output is likely to compress the premium historically enjoyed by Australian high-grade producers, Wilsons warns, being BHP Group ((BHP)) and Rio itself, which could result in lower realised prices.

That said, Wilsons notes since FY20, BHP’s earnings composition has shifted meaningfully. Copper’s contribution has more than doubled, rising from 19% to a forecast 40% in FY25, while iron ore has declined from 64% to 57%. Rio has undergone a similar transformation, with iron ore’s earnings share falling to 57% from 76%, while copper and aluminium have each doubled to 20% and 18%, respectively.

This has resulted, over the past two years, in the total returns of both companies broadly tracking their underlying commodity baskets, rather than moving in lock-step with the iron ore price.

Lithium: Nothing to See Here

Over the June quarter, lithium spodumene prices averaged US$670/t, Morgans notes. Spodumene traded at around US$800/t at the beginning of the quarter but prices collapsed rapidly over May and June to US$610/t.

Since the end of the quarter, spodumene prices have rebounded 24%, currently sitting at around US$757/t, following restocking trends and announcements of supply disruptions in China, but Morgans notes this is still too low a price for Australian producers.

According to an announcement by Zangge, its brine lithium production ceased due to outstanding resource development permits. While the company aims to resume production once all necessary approvals are secured, no restart timeline has been provided.

The suspension came as a surprise to Macquarie. More importantly, the stoppage took place at a brine operation, which tend to be more cost-competitive than hard rock operations. Macquarie notes the operation has an annual production of 11kt, which represents less than 2% of China’s annual lithium output.

In 2024, Australia alone exported some 470kt of spodumene, with 95% of that exported to China.

Morgans view of the recent -11ktpa reduction in lithium carbonate equivalent supply in China due to regulatory non-compliance is that it is likely temporary and, when compared to global supply, very immaterial.

Macquarie notes lithium futures and equities rallied on a brine operation stoppage, and these analysts, too, suggest the impacted volume is immaterial.

Macquarie sees the lithium market remaining oversupplied in the near term, with potential catalysts emerging in the December quarter.

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