[SINGAPORE] Iron ore, the backbone of China’s steel-fueled boom for more than two decades, is facing a pivotal demand shift.
The ferrous metal’s fortunes are now decoupling from the country’s property sector to hinge more on infrastructure projects and high-tech machinery demand, a shift reflecting broader economic trends in China, Tan Tee Yong, head of commodity derivatives of SGX Group, told The Business Times.
The demand for iron ore, as a crucial raw material in steel production, will be supported by China’s growing emphasis on “electrification, digitalisation and greenification – sectors that are inherently steel and iron ore-intensive”, he added.
In China, the infrastructure sector will overtake property to be the biggest end-user sector for steel in 2025, based on a report by S&P Global Commodity Insights, raising forecasts for infrastructure consumption for both 2025 and 2026 to 234 million tonnes and 227 million tonnes, respectively.
Paul Bartholomew, senior analyst of metals and mining research of S&P Global, highlighted that the Chinese government has announced plans to improve the country’s water infrastructure, while its infrastructure investment remained steady in the March quarter, government data indicated.
On the other hand, steel consumption in the property sector is expected to fall 8 per cent in 2025, an improvement from an almost 12 per cent year-on-year decline in 2024, said Bartholomew.
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Beyond China
While China’s demand for steel – which is estimated to drop 2 per cent on the year by S&P Global Commodity Insights – is slowing, market watchers have seen rising demand for steel and subsequently iron ore, its primary raw material, elsewhere in the world.
“Beyond China, urbanisation and industrialisation continue to drive demand for iron ore globally,” said SGX’s Tan, adding that regions such as Asean and India, in particular, are emerging as key growth markets for the ferrous metal.
S&P Global’s Bartholomew noted that India, which is adding at least another 30 million tonnes per year of steel capacity over the next five years, is still in steel production growth mode.
Facilities in the Middle East and Europe under construction, accounting for about 50 million tonnes of direct reduced iron in the respective region, will also require high-grade iron ore.
“So while China is inevitably slowing, there will be growing demand for iron ore from other regions,” as reflected by the massive investment in the Simandou high grade iron ore project in Guinea, noted S&P Global’s Bartholomew.
Unexpected portfolio diversifier
For institutional investors, iron ore could be more relevant as an unexpected diversifier in a balanced portfolio of 50-50 stocks and bonds, indicated a report released by S&P Dow Jones Indices in collaboration with SGX Group on Tuesday (May 27).
Iron ore, proxied by the S&P GSCI Iron Ore index, was found to improve the risk-adjusted returns of the balanced portfolio.
Sharpe ratios, with its higher values indicating the more attractive risk-adjusted returns, would be improved by 7 per cent to 19 per cent, with optimal weight of iron ore ranging from 4 per to 9 per cent, said the report.
Among the four commodities studied – iron ore, gold, crude oil and copper – iron ore is the only one that provided an increase in potential return while reducing the strategy’s volatility, for weighting up to 5 per cent.
“Beyond the 5 per cent weighting, iron ore continued to provide increased return, albeit also introducing higher volatility. Other commodities by contrast, offered a reduction in volatility at the expense of some return,” said the report.
The report also found that iron ore’s historical edge also came from persistent backwardation, where near-term prices topped futures, allowing investors holding contracts over time to profit by rolling contracts at lower prices.
This positive roll-yield, rare in commodities, amplified returns for a long-holder even with small allocations, while cushioning volatility.
Prices for iron ore, which soared nearly tenfold during China’s construction frenzy, are now under pressure from a prolonged property slump and the economy’s tilt towards services.
BMI expects iron ore prices to be weighed down by a subdued demand outlook, while remaining supported by renewed optimism over easing trade tensions.
In a report released on May 15, the team maintained its 2025 iron ore price forecast at an annual average of US$100 per tonne, a 3.6 per cent year-on-year decrease from estimated 2024 average price of US$103.7 per tonne.