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The anticipated disruption to the iron ore market from a surge in China's scrap steel usage has yet to materialise, providing a favourable outlook for Australia's major mining companies, including BHP, Rio Tinto, and Fortescue. These companies are set to release their financial reports next week, with iron ore profits expected to be a significant contributor.
Despite predictions of a decline in iron ore prices due to slowing construction activity in China and the rise of domestically sourced scrap steel, recent developments suggest otherwise. Westpac Bank forecasts a modest drop in iron ore prices by mid-year, while Morgan Stanley holds a more optimistic view, projecting a potential increase to $140 per tonne in the June quarter.
Morgan Stanley's analysis indicates that scrap steel's penetration into China's steel industry remains limited, contrary to earlier expectations. While electric arc furnaces rely heavily on scrap, blast furnaces continue to dominate steel production, with iron ore as the primary feedstock.
Several factors contribute to the restrained growth of scrap steel usage in China, including the tight correlation between steel mill profitability and scrap costs, a downturn in the property market affecting demand for steel products, and an underdeveloped scrap collection and processing infrastructure.
The persistence of these challenges suggests that scrap steel's diminishing role in China's steel production could be prolonged, ensuring continued demand for iron ore. This dynamic reinforces the stability of the iron ore market and provides a positive outlook for mining companies reliant on iron ore profits.
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