In the futures market, there has always been a joke saying that market speculators usually have two kinds of mysterious illusions, one called rubber will rise, and the other called iron ore will fall! Some people even say: "What analysis does iron ore need? The most wasteful analysis of varieties, no matter how to analyze, it will rise. The most expensive button is the button for short positions in iron ore, and that button must be removed." It can be seen that the market has formed an extreme muscle memory for iron ore bulls, and now this situation may be broken!

1. The iron ore boom is about to end

Recently, Bloomberg published a commentary, saying that the iron ore boom is about to end. The commentator believes that oil, copper, soybeans, and some other commodities have monopolized people's attention, but among all commodities, the unremarkable iron ore has benefited the most from China's economic prosperity over the past 25 years.

This is an astonishing fortune: from the late 1990s to earlier this year, the price of iron ore has risen nearly tenfold - an increase greater than any other major commodity;

The transaction volume has tripled;

Australian commodity tycoons have become billionaires;

Mining companies have become Wall Street's darlings, even if only briefly;In order to contend for control over the last batch of untapped mineral deposits, a fierce legal battle has erupted.

Now, everything is over: the largest commodity boom of the 21st century to date has come to an end. China took it to its peak, and China is also sending it back to the starting point.

The cost of red ore transformed into steel within the blast furnace has dropped below $100 per ton, a 55% decrease from the historical high of nearly $220 per ton set in 2021.

In addition, China's infrastructure outlook appears bleak: steel demand has reached its peak.

If you were to ask me for a specific date, I couldn't provide one. But it is becoming increasingly clear that China's steel demand peaked at some point between 2020 and earlier this year.

What is the reason? China's economic model is shifting from heavy investment in infrastructure and housing construction to the service industry.

In previous economic downturns, Beijing rescued the economy, and thus the iron ore and steel industries, through debt-fueled massive construction.

This time, China is unlikely to do so again.

The core point of this long passage is that over the past 30 years, China has driven the demand for iron ore, and now that Chinese demand has peaked, global iron ore demand will enter a trough!

2. What is the truth?Let's first take a look at the global distribution of iron ore demand.

In 2023, the global crude steel production for the whole year was 1.888 billion tons. Among them, China, without any suspense, continued to rank first in the world with a proportion that accounts for more than half of the global market. That is to say, nearly 50% of the world's iron ore was used by the Chinese.

In all of China's crude steel consumption, real estate accounted for 1/3, infrastructure accounted for about 1/5! Automobiles, machinery, steel structure, home appliances, shipbuilding, and so on, occupied the remaining share.

Steel is mainly consumed in the construction process of real estate. We can see the data that from January to June 2024, the national new commercial housing sales area was 479.16 million square meters, down 19.0% year-on-year, which is an obvious impact on the demand for rebar.

Therefore, Bloomberg's view has a logical basis, and China's real estate consumption of global iron ore reaches 15%. For every 10% decrease in new construction area, global iron ore demand will decrease by 1.5%.

Logically speaking, such a large cliff-like demand decline for iron ore should be like this year's glass. Once the delivery of buildings is stopped, the demand for glass plummets, and now it has fallen to 1200. "Glass: Deep discount, is there still room for further decline?"

However, the problem arises.

Logically speaking, with the support of building delivery, the decline in glass demand should be behind rebar. Why didn't iron ore collapse last year? ("Iron Ore: Don't be afraid! Short it above 900!")

First, there was a significant increase in exports and a decrease in imports.

In 2023, the depreciation of the yuan increased the export advantage of steel. Coupled with China's technical and scale effects, Chinese steel is competitive in the global market. In 2023, China exported 90.26 million tons of steel, a year-on-year increase of 36.2%; the import of steel continued to decrease to 7.65 million tons, a year-on-year decrease of 27.6%.Second, the rise of new energy. The demand for photovoltaic brackets has increased rapidly over the past two years, especially since the beginning of 2023 when the price of photovoltaics has dropped significantly, driving a rapid increase in photovoltaic installations. In 2023, China's new photovoltaic installations reached 216.88 GW, a year-on-year increase of 148.1%.

Third, automobiles. Automobiles are also major consumers of steel. In 2023, China's automobile production and sales volumes reached 30.161 million and 30.094 million units, respectively, with year-on-year growth of 11.6% and 12%, respectively, both setting historical records.

Fourth, machinery. Machinery, including excavators, bulldozers, and the shipbuilding industry, are all in a very strong phase. Especially the shipbuilding industry, from January to December 2023, the national shipbuilding completion volume was 42.32 million deadweight tons, a year-on-year increase of 11.8%; the new order volume was 71.2 million deadweight tons, a year-on-year increase of 56.4%.

In fact, such phenomena also occur in glass, but what is different from steel is that the cost of switching glass production capacity is relatively high. From 2022 to 2024, China's photovoltaic glass production daily melting volume increased from 56,500 tons to 111,900 tons, an increase of 98.19%.

Therefore, although the demand for steel from China's real estate has shown a significant decline, the demand for steel from other industries has quickly supplemented it, filling the demand for steel. The decline in iron ore demand is not as severe as imagined.

3. The end is far from here.

For iron ore, the question we need to ask now is:

Can the filling of other increments replace the decline in demand from China's real estate? I think it is not enough. Because the downturn in China's real estate in this round is too steep! (July economy: the lotus leaves are just showing their tips, if you are a dragonfly, hurry up!)

For example, in 2023, China's new commercial housing area was 1.1 billion square meters, while the United States only has more than 1 million new houses a year. According to 200 square meters per set, the actual need is only 200-300 million square meters, which is enough. (China's per capita living area is lower, and the U.S. population is smaller)

That is to say, compared with mature economies, China's current supply capacity of real estate is far more than enough. Note that the word used here is far more. The steel used in real estate must be cut by at least more than 50% from the peak! Next, the de-capacity process of the steel industry will be a very cruel process, and as the downstream enterprises are not happy, the upstream enterprises will naturally also have to pay the bill, and iron ore cannot escape.Many people believe that high-grade iron ore is primarily concentrated in Brazil and Australia, monopolized by BHP Billiton and Rio Tinto. Therefore, once downstream prices are supplemented, upstream production will be reduced to maintain the price of iron ore.

This argument lacks an understanding of the industry. After enterprises spend a lot of money to buy mines, they need cash flow to sustain themselves. If you don't sell, someone else will. In fact, it still needs to start from supply and demand. Otherwise, iron ore wouldn't have fallen to 300 back then.

The following chart can well describe the supply and demand situation of steel. The bottom of steel used in real estate is still far from coming, and the incremental space for other steel usage is gradually declining. For example, shipbuilding has a certain capacity, and so does the automotive industry. China uses a lot of steel for cars, which will also squeeze the global automotive steel. Even if there is an increase, it will not have a significant impact on global automotive steel.

Therefore, India has become the only hope to save iron ore. Now, the world can simultaneously meet the requirements of a large batch of steel demand, a large base population and many other harsh conditions, only India. If India can top China's steel demand, then iron ore is worry-free!

However, let's look at the specific data, India is still too small.

According to statistics from the World Steel Association, India's steel production in 2023 was 140 million tons, a year-on-year increase of 11.80%, accounting for 6.64% of the global crude steel output. Although India's growth rate is fast, China's steel production is 1 billion tons, such a huge gap, India may not be able to fill.

If we follow the current script, it should not be a problem for iron ore to enter the lowest point of 500+, but the prerequisite is that there is no significant global inflation, which is uncertain.

Assuming China still wants to struggle, and has launched a very fierce fiscal stimulus plan, it is normal for the demand for steel to increase instantly, and steel will rebound. However, if neither China nor the United States has introduced a strong fiscal stimulus policy, the prosperity of iron ore is becoming a reality.

It is highly likely that there will be no strong domestic policies. The upper level has already seen that the current problem is a cyclical issue, and it can only be supported, otherwise, the more it rebounds, the more serious the consequences will be. However, it is hard to say about the United States. Looking at Harris's recent policies, they are also expansionary, even more so than Trump. However, even if it is implemented, it is probably a matter for next year.