Ironman: Endgame
April 2019
Iron ore by and large has been used to make steel. Over its long history, the evolution of the steel making process have been economically and environmentally simplified into what we have today. Iron ore mines produce lump, fine and concentrate either used domestically or exported into the seaborne market ultimately ends up in either a blast furnace or a Direct Reduced Iron (DRI)/Hot Briquette Iron (HBI) plant to make pig iron and DRI/HBI.

The intermediate products are then fed into either the traditional Basic Oxygen Furnace (BOF) or the more recent Electric Arc Furnace (EAF) to make crude steel.



Pig Iron Production Trends

Around 94% of iron ore is used to produce pig iron while the remaining 6% is used for DRI/HBI. Production of pig iron has been steadily increasing from 933 million tonnes produced in 2009 to approximately 1,250 million tonnes in 2018 and is expected to increase steadily to over the long term to over 1.4 billion tonnes of pig iron.



Majority of the production of pig iron is expected to come from mainland China forecasted at around 61% for China with Japan and India second at around 6% each. China is however facing increasing environmental and governmental pressures to cap their supply of steel over the long term which is likely to see them turn their focus more towards EAF and DRI/HBI.


Basic Oxygen or Electric Arc? What difference does it make to iron ore?

Both BOF and EAF processes are used to make crude steel using iron ore. However, the consumption rate of iron ore in the BOF processes is much higher with EAF as EAF can process a larger amount of scrap steel to make crude steel. Scrap steel is a strong competitor to the iron ore market as it is able to directly substitute iron ore in the steel making process.



While steel production is forecasted to grow over the long term, the proportion of electric arc furnace production is also increasing at a rate faster than basic oxygen furnaces and is expected to increase beyond 30% of steel production by 2021. This means that in the future, the reliance on iron ore will start to diminish as steel producers look towards increasing their scrap steel supply. However not everything is doom and gloom for iron ore in the short term as basic oxygen furnaces are still considered the cheaper and more reliable method of steel production.

EAF’s popularity and growth, with an expected CAGR of 2.2% over the 2024-2039 period, is mainly because it is considered a more environmentally friendly approach to steel making and generates around 73% less CO2 than BOF. While BOF’s growth is expected to happen in developing economies, the largest steel making country China have been aggressively pursuing the construction of EAF to improve environmental conditions.


The future of iron ore’s end use demand

The long-term iron ore demand will still see an upward trend and is expected to grow by around 0.6% per year. Pellet demand is expected to grow by a CAGR of 3.33%. The growth in this demand will, as with many things, be concentrated in developing countries that are bucking the pessimistic global expectations of economic slowdown. Key driving countries to watch out for include India and Vietnam which are ramping up steel production. Both these countries have little EAF presence and will most likely be the emerging source of iron ore demand to feed their BOF operations. In summary, expect end use demand of iron ore to shift away from China.