The outlook for the South African iron-ore industry remains “bleak”, owing to stagnant local economic growth, a negative local investment environment and a significant drop in global demand for iron-ore, says commodities market analysis firm Core Consultants MD Lara Smith.

She emphasises that the global iron-ore industry has been in “tumultuous territory” for several years, as a result of demand fluctuations in China, the world’s largest consumer of metals. This being the case, South Africa’s iron-ore industry has been under further pressure, owing to the myriad of local challenges compounding local industry hardships.

Smith reiterates that economic growth is the primary factor that drives iron-ore supply and demand. “When economies are growing, the need for steel in construction increases, which drives the iron-ore price up.” A 2.2% decline in gross domestic product (GDP) in the first quarter of this year has resulted in a lack of new infrastructure projects in South Africa, which has had a knock-on effect on the local demand for steel and its feedstock, iron-ore.

Political uncertainty and pending mining legislative reforms, such as an amendment to the Mineral and Petroleum Resources Development Act and the latest iteration of the Mining Charter, are also causing difficulties in the industry, which is already combating an unstable commodity spot price, she adds.

“South Africa is simply not investable and continual changes to Mining Charter III have left a bad taste in the mouths of potential global investors. South Africa as an investment destination now presents too much risk.”

She stresses that domestic economic growth is pivotal to the success of domestic bulk commodity production. However, without new international investment or government-funded projects, South Africa’s outlook for more positive GDP growth figures and a future uptick in local demand for iron-ore does not seem promising.

International Influence

Local iron-ore producers are struggling to export their excess volumes of product when internal demand dips, owing to the international iron-ore bear market, says Smith.

Meanwhile, China clamped down at the beginning of this year on harmful emissions levels by distributing emissions licences and levying harsher environmental taxes that forced steel producers in the country to comply by lowering steel production output.

“China’s attempt to rein in emissions has been ongoing for some time now but, two months ago, the country announced that environmental clampdowns will continue for the next three years across a number of industries. This is having a notable effect on global demand for iron-ore. It means that China will produce lower steel volumes, resulting in lower iron-ore consumption rates.”

Yet, the global supply of iron-ore has persisted and has even increased during the year, leaving a market that is severely oversupplied, Smith highlights. She states that the world’s four largest iron-ore suppliers – Brazilian mining company Vale, Anglo-Australian mining company BHP Billiton, Australian iron-ore company Fortescue Metals Group and Anglo-Australian mining company Rio-Tinto – have collectively increased their exports from 62% of the total in 2014 to 70% in 2018.

These export levels are predicted to rise to between 72% and 73% before the end of the year, she adds. This continual oversupply has also resulted in increased port stocks in China, as iron-ore is imported faster than it is being used. This, in turn, has resulted in a global lapse in iron-ore demand as China – which would ordinarily consume around 62% of the world’s iron-ore imports – is now unable to deplete its port stocks.

Smith believes that the global iron-ore industry is currently “challenging” and will continue to be so, until China has stabilised its environmental controls and begins to develop its next wave of cities. She further expects iron-ore demand to increase again in China after at least five years.

Once global consumption starts to increase, established iron-ore producers that remain operational will continue to take market share. In the interim, she adds that global suppliers will be required to find a way to remain afloat until global demand begins to recover.

However, Smith states that South Africa’s iron-ore industry cannot remain competitive in the global market by continuing on the same investor-unfriendly path.

“In the past few years, South Africa hasn’t missed a single opportunity to miss an opportunity” in the iron-ore industry, she stresses.

Smith states that South Africa’s public and private sectors need to establish a collaborative approach to legislative formation processes that allow for progressive policies to be established in the sector while avoiding investor uncertainty.