Chinese iron ore production will contract as it faces shrinking demand and cheaper high quality imports.
As the iron ore market continues to weaken Chinese mines are being hit even harder than Australian operations, and predictions forecast that internal Chinese output will shrink by 12 per cent this year, according to Bloomberg.
New data Goldman Sachs stated that Chinese output fell 20 per cent to 311 million tonnes in 2014, and forecast it to continue this downwards trajectory to 271 million tonnes in 2015, and move south again next year.
Iron ore has been in a freefall over the past year, with the slump biting harder into miners’ bottom lines.
ANZ has cut iron ore price forecasts for the next two years as a result of expanded low-cost supply and flat demand.
The bank says iron ore will average $US55 a tonne in 2016, down $US5 a tonne on earlier predictions.
In 2017, ANZ expects iron ore will fetch an average of $US60 a tonne, down $US3 a tonne.
For the rest of 2015, the iron ore price is expected to average $US56 a tonne.
An oversupply of the commodity and slow growth out of China worked to push the price of iron ore to a record low of $US46.70 tonne on April 2.
Since then, the price has recovered to around $US56 a tonne after announcements from two of the world’s biggest producers – BHP Billiton and Vale – that they would cut output.
The Australian Government has also been just as negative on the price, with the most recent budget pegging the price to an average of US$48 per tonne.
This is down from the $US60 a tonne that Treasury predicted the commodity would fetch when it updated its budget in December 2015.
The price cut is expected to slash around $A20 billion in tax receipts from forward estimates.
Since the last budget, the value of forecast iron ore exports has been downgraded by around $90 billion.
The government also does not expect demand out of China to show a substantial increase.
The world’s biggest importer of iron ore has set a 7 per cent growth target for 2015 and budget papers predict weakness in China’s housing sector is expected to weigh on the country’s continued demand for iron ore.
"This reflects the substantial stock of unsold housing that has built up over recent years, as housing starts have consistently outstripped sale," it said.
This direction will hit China particularly hard.
“[Chinese] mines not part of larger cash or credit line-rich steel groups are facing annihilation,” Georgi Slavov, head of basic resources research at Marex Spectron Group, said in an e-mail to Bloomberg.
“Utilisation in China keeps dropping, which means more and more mines are struggling to meet the ends and produce.”
This was supported by comments from China Iron & Steel Association deputy secretary-general Li Xinchuang, who recently said the country's steel production would not reach the one billion mark.
“It cannot (get to one billion), trust me, I have been in the business 30 years,” he said.
"We understand it cannot go over 900 million tonnes — we think roughly 800 million to 870 million.”
In an effort to support these Chinese operations, the nation has introduced tax cuts for the mines to help margins, but it is unlikely to alleviate the annihilation of many mines.
“For the majority of private mines it is simply not enough to make much of a difference,” Paul Gait, an analyst at Bernstein in London, told Bloomberg.
A combination of high cost and low grade meant “have no real economic role to play in the long term.”
Despite this, Rio Tinto believes China is still a prospective market for its iron ore.
At the 2015 Global Metals, Mining and Steel Conference Rio Tinto CEO Sam Walsh said the story out of China is being mistold, and that growth in the country is strong, even though it is changing.
“This year’s estimated increase of 7 per cent in Chinese GDP is just over $1 trillion, larger than the economy of Poland,” Walsh said.
“The nature and mix of growth in the Chinese economy is also changing, and I will say more on this shortly, but let’s be clear that in this new normal we will still see continued solid economic growth from a larger base.”
Walsh said this “new normal” would see around 1 billion tonnes of Chinese crude steel production by 2030, which requires average growth of around 1 per cent per annum.
However with weakened demand in China, and continued output from Rio, BHP, and Vale, the bloodbath in iron ore is likely to spread beyond China’s borders and, majorly affecting the other high cost producers that began at the height of the boom, clearing the market.