Chinese demand for iron ore and metallurgical coal, which contracted this year as steel production slumped on the weakening residential property market, is expected to return to growth next year, according to Australia’s resources government forecaster. The slowdown in the residential property market in China, the world’s largest producer, consumer, and exporter of steel, “remains a key risk to growth prospects and steel demand”, according to Australia’s quarterly Resources and Energy publication. The Department of Industry, Science, Energy and Resources quarterly report was released on December 19.

Australia’s exports of iron ore are estimated to increase by 5.5% in 2022 and 2.8% in 2023, its government forecaster said. Iron ore and coal are used in steelmaking with around 1,400 kg of iron ore and 800 kg of coal needed to produce one tonne of steel. Some 72% of Australia’s iron ore is shipped to China, leaving export volumes exposed to the country’s property slump and steel consumption headwinds that have accelerated in the past three months. Australia is the world’s largest iron ore exporter and second-largest coal exporter after Indonesia, with volumes a key generator of demand for capesize and panamax bulk carriers in the Pacific region. Global trade in iron ore shrank 2.8% this year to 1.65bn tonnes, led by a 3.4% contraction in imports from China, which takes 71% of all volumes, according to the report.

“China’s efforts to address surging property prices and high debt in its residential property sector also appear to be taking effect and is expected to lead to lower construction activity going into 2022,” the report said. “With the property construction sector, a major end-user of steel (around 30% of China’s total demand), continued weakness in this sector has significant implications for iron ore demand over the outlook. However, China’s efforts to de-leverage its residential property sector and remove fiscal stimulus are likely to face growing challenges moving into 2022. This follows weaker economic activity and renewed outbreaks of the Covid-19 pandemic in recent months.”

Power shortages and electricity rationing have also weighed on manufacturing in China in the final half of 2021. It was unlikely that China’s construction activity would return to the levels seen in the first half of 2021, the report said. It was this supercharged steel-making and raw materials demand in early 2021 that lifted dry bulk rates to 13-year highs, before rates dropped off sharply on the back of falling production in China.

Australia’s iron ore export volumes gained 0.8% year on year to 874m tonnes, and will rise a further 49m tonnes in 2022, according to the report. China’s imports are forecast to gain 2.7% in 2022, to 1.16bn tonnes. World steel production is estimated to reach 1.95bn tonnes in 2021, up some 4% from 2020, the report said. The Australian government agency forecasts global steel production will rise 2.8% in 2022, topping 2bn tonnes for the first time. There will be a further 2.6% gain in 2023, according to the report.

Last year saw double-digit, or near double-digit, growth for major steel producers including the US, European Union, India and Japan, even as Chinese production and consumption slumped by 1% and 0.6% respectively. China makes up around 55% of global production, the report said. Initially, steel output and economic activity was slower to rebound from the pandemic disruptions of 2020 for producers outside of China. However, “the recovery in many advanced economies remains well underway as 2021 ends”, according to the report. Steel production in the EU — the second-largest steel-producing economy — grew by 9.3% year on year for 2021, spurring a 24% increase in iron ore imports. This was also 2% higher than the same period in 2019. Imports will be flat in 2022 and 2023.

About 7.7m fewer vehicles were produced in 2021, according to the Resources and Energy publication because of global supply chain disruptions and the current shortage of global semiconductor chips. With chip shortages expected to persist well into 2022, this has significant implications for global steel markets, the report added. Australian exports of metallurgical coal used in steelmaking are expected to recover from this year’s 0.9% contraction, with a year-on-year rise of 5.3% to reach 179m tonnes. Overall world trade in metallurgical coal is expected to rise 4.4% in 2022 and another 2.8% in 2023. Chinese imports were down 24% this year at 55m tonnes but are expected to gain 10m tonnes over the next two years.

Despite climate change pressures, world trade in thermal coal is seen posting year-on-year gains in 2022 before contracting in 2023. India will increase imports by 8.3% in 2022, to 164m tonnes, while Japan, China, South Korea, and Taiwan are all expected to reduce shipments.