China's steel overproduction crackdown brings hope for Australian iron ore miners

Beijing’s latest supply-side reforms provide some hope for Australian iron ore miners after a brutal financial year in which the materials sector significantly lagged the broader market.

Steel production accounts for approximately 15 per cent of China’s greenhouse gas emissions. Picture: Getty Images

After one of their worst years in recent memory, iron ore giants BHP, Rio Tinto and Fortescue have reason for cautious optimism as a glimmer of hope emerges from Beijing.

China’s recent commitment to tackle “disorderly competition” in its steel sector and phase out inefficient capacity lifted iron ore futures to a six-week high of close to $US97 a tonne last week.

It came as the 6th Meeting of China’s Central Finance and Economics Commission, where President Xi Jinping and top economic leaders declared war on the chronic overcapacity plaguing China’s steel industry. The message was clear: Beijing will no longer tolerate the days of cutthroat competition and razor-thin margins that have defined China’s steel sector for years.

The glory days of the mining boom for bulk commodities are certainty in the rear view mirror with the iron ore sector notched up a dismal performance in the 2025 financial year, resulting in the ASX 200 materials index falling 6 per cent. In the same period, the ASX 200 rose 10 per cent and the financials sector jumped 24 per cent as banking sector heavyweight and recent market darling Commonwealth Bank soared 45 per cent.

BHP, Rio Tinto and Fortescue shares fell between 10 and 29 per cent to be among the worst of the ASX 20.

President Xi Jinping wants margins on China’s steel to improve. Picture: AFP

China’s steel mills have been caught in a vicious cycle of overproduction, churning out steel at break-even or negative margins while flooding global markets with cheap exports.

But the implications for iron ore prices are unclear. Seasoned observers are urging caution.

The hope is that Beijing’s push to eliminate this unbridled competition will improve profitability for China’s steel mills and demand for high grade iron ore.

But Citi analyst Paul McTaggart says history suggests a different outcome, particularly given the scale of steel production cuts that would be needed to significantly lower China’s steel exports.

A worker supervises molten iron at a furnace in Changzhou. Picture: Getty Images

When China last implemented forced steel production cuts in 2021, production plummeted from 100 million tonnes in May to 69 million tonnes by November – a 22 per cent year-on-year decline.

Initially, iron ore prices held firm, but as steel output fell, the laws of supply and demand kicked in, driving prices lower. The pattern was depressingly familiar. China’s industry discipline faded.

By 2022, steel production had rebounded sharply, rising 18 per cent on year by September.

Net steel exports surged from an annualised 40 million tonnes in late 2021 to more than 120 million tonnes in recent months, crushing margins once again.

“Lower steel China production has, ultimately, seen iron ore prices lower,” Mr McTaggart says.

Improved Chinese mill margins would favour higher-grade iron ore over lower grades.

Australian miners are mostly high-grade producers.

But McTaggart cautions that a reduction of Chinese steel production to lower exports at a more reasonable level of 50 million tonnes per annum would require a cut in steel production of around 70mtpa, which would cut iron ore demand by a massive 115mtpa.

“Sorry to say, this would not be positive for iron ore pricing,” McTaggart says.

Yet there are reasons to believe this time could be different. Unlike previous interventions focused purely on production cuts, Beijing’s current approach emphasises structural reforms to eliminate overcapacity permanently. The government is targeting multiple sectors including photovoltaics and cement, suggesting a more comprehensive strategy to address China’s deflationary pressures.

Beijing’s approach emphasises structural reforms to eliminate overcapacity. Picture: Bloomberg

Commonwealth Bank’s head of mining and energy commodities strategy, Vivek Dhar, says reducing competition and curtailing spare capacity could help iron ore prices without hurting demand.

The key distinction is between production cuts – which directly reduce iron ore consumption – and capacity rationalisation, which can improve mill margins while maintaining output levels.

For Australian miners, the quality differential could prove crucial.

When Chinese steel mills enjoyed healthy margins in May 2021, high-grade 65 per cent iron ore traded at 118 per cent of the benchmark 62 per cent grade, while lower-grade 58 per cent ore fell to just 71 per cent of benchmark prices. Currently, these ratios sit at 110 per cent and 87 per cent respectively, suggesting room for further quality premiums if mill profitability improves.

This trend particularly benefits Australia’s premium ore producers.

BHP and Rio Tinto’s high-grade Pilbara ores command premium pricing when steel mills can afford to optimise their blast furnace operations. Fortescue, meanwhile, has been investing heavily in beneficiation technology to upgrade its traditionally lower-grade product.

The challenge remains execution.

China has attempted supply-side reforms in its steel sector since 2015, introducing capacity swap mechanisms in 2017 that theoretically force steelmakers adding capacity to remove even more existing capacity. However, exceptions and the ability of new mills to produce above nameplate capacity have undermined these efforts.

Environmental considerations add another dimension. Steel production accounts for approximately 15 per cent of China’s greenhouse gas emissions, providing additional motivation for capacity rationalisation beyond pure economic efficiency.

For Australian investors, the question is whether to bet on Beijing’s renewed commitment or hedge against another false dawn. The materials sector’s deep underperformance has left many stocks trading at attractive valuations relative to their long-term fundamentals.

But the scars from previous disappointments run deep.

After soaring on Wednesday and Thursday, the big Aussie iron ore miners stalled on Friday.

The reality is that Australian iron ore miners remain hostage to Chinese policy decisions and steel mill margins. The current reform rhetoric sounds more comprehensive than previous attempts, but he proof will be in sustained implementation rather than temporary production curtailments.

What’s clear is that the sector desperately needs this reform push to succeed. With new African supply from projects like Simandou set to hit the market by the end of 2025, Australian miners face growing competition for market share.

Success in Chinese supply-side reforms could provide the margin relief needed to navigate this more challenging landscape.

For now, cautious optimism seems the appropriate stance. Beijing’s latest intervention offers genuine hope for structural improvement in Chinese steel industry dynamics. Whether this translates into sustained benefits for Australian iron ore miners will depend on China’s ability to break the cycle of overcapacity that has plagued the sector for nearly a decade.

Originally published as China's steel overproduction crackdown brings hope for Australian iron ore miners