Mapping iron ore’s doom

Yesterday Australia received some very, very big news. It wasn’t reported because it’s pretty scary. Goldman summed it up nicely:

NBS released the key results of the 7th population census today. Overall population in China reached 1.412 billion in 2020, an average growth rate of 0.53% yoy from 2010 to 2020; in comparison with the average growth rate of 0.57% from 2000 to 2010.

Overall dependency ratio is 46% vs 34% in 2010. Old age dependency ratio (population aged 65 or above divided by population aged 15-64 years old) is 20% in 2020 vs 11% in 2010, pointing to increased population aging pressures.

Key numbers: Chinese population in 2020: 1.412bn vs 1.40 bn in 2019 (note that 2019 data are based on population sample survey, not census), vs 1.340bn in 2010 (the previous population census)

Population aged 15-64 in 2020: 968 mm, vs 999.14 mn in 2019 (note that 2019 data are based on population sample survey, not census), vs 999 mn in 2010 (the previous population census).

Urbanization ratio reached 63.9% in 2020, up from 49.7% in 2010. (2019population sample survey suggests urbanization ratio at 60.1% in 2019).

These are very bad numbers for China’s demographic dividend, which is fast going into reverse. The dependency ratio is ratcheting higher much quicker than anybody expected. And as the number of dependents absorbs an ever-higher ratio of production, the state is having to use up its key offset of urbanisation-led growth ever more quickly.

Last year we all thought the Chinese urbanisation ratio was under 61%. Now it’s 64%. The latest Five Year Plan aimed for 65% by 2025 yet we are almost there today.

What this means is that China’s great one-off build-out is materially closer to the end than we thought. How close is a policy choice. But the end of the road is now clearly in sight so some very sticky decisions need to be asked now.

One could argue that the slowing urbanisation rate in the latest Five Year Plan is one such. Here’s what it will look like for the number of people moved into cities if the CCP sticks to it:

That is, 175m less people moved in the 2020s, or three-quarters fewer than the previous decade. Now, I don’t think that that will happen. If it did I would expect iron ore to be trading at $10 sometime pretty soon (down from today’s $233.10) as Chinese growth cratered.

Rather, I suspect the CCP will elect to slow and stretch out the benefits of urbanisation, so a pattern more like the following is my base case:

Still, even that is pretty dire for building and iron ore once you look past your nose. Roughly 20-30% fewer people moved per year versus the last decade amounts to the same drop in the volume of apartments and infrastructure per annum to 2030. And considering much of it has been built out ahead of time…well, you get the picture.

There is one more scenario worth considering. If China were to keep the urbanisation pedal to the metal and use up what’s left of this potential growth at the current rate:

In that case, we’ll see more of a gentle flight path lower with roughly 30m fewer people moved per year, then the total crash of urbanisation as a growth driver by 2030.

The middle path is the one I’d take. It offers diminishing but ongoing growth support, as well as time to structurally reform the economy.

More to the point for this post, and today’s boom, there is no scenario ahead for Chinese urbanisation in which iron ore demand benefits. On the contrary.

Unless, of course, the CCP builds empty apartments and bridges to nowhere directly into middle-income trap oblivion.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments are hidden for Membership Subscribers only.