Predicting any end to the collapse in iron-ore depends mostly on how much you think will be needed to make steel in China.

Trouble is, some forecasts of steel output over the next few years are almost polar opposites, from a record surge to 1.1-billion tons to a plunge of more than a third to 500-million tons. The 600-million-ton difference in those estimates represents about enough metal to supply all of Europe, the Americas and the rest of Asia for a year.

Some owners of iron-ore mines, including Rio Tinto Group and BHP Billiton, remain bullish and expect Chinese steel demand to grow. China-based J Capital Research analyst Tim Murray and independent economist Andy Xie say steel output is already falling, a signal that a two-year slump in iron-ore prices and the pressure on producer margins may only get worse.

“When you have such a wide divergence between forecasts, that does put investors into a difficult position,” says Edward Smith, Melbourne-based chief investment officer at LegalSuper, which manages A$3-billion ($2.2-billion) and holds BHP Billiton and Rio Tinto shares. Variances “of that magnitude, and where we are talking about double the amount, that does seem unusual”, he says.

For now, the bears are prevailing, with steel production in China poised for the first yearly contraction since 1990. Iron-ore is down 71% from a peak of $191.70/t in February 2011, and touched a low of $44.59/t on July 8, according to a bench-mark tracked by Metal Bulletin.

With Rio Tinto, BHP and Vale boosting output to protect market share, prices may slide into the $30s this year, says Xie, who accurately predicted more than two years ago that a glut of ore would send prices into a tailspin.

China’s economic expansion is the weakest in 25 years, reducing demand for steel in homes, roads and appliances. The central bank devalued the yuan this month, sending the currency to its steepest two-day drop in two decades and prompting investors to speculate the move was intended to revive growth.

Yearly steel output in China, which uses about 70% of the world’s traded iron-ore, may drop below 500-million tons in the next decade, compared with the government estimate of a record 823-million tons last year, Xie says. J Capital’s Murray predicts output at 600-million tons by 2018. At the same time, iron-ore output is rising from lower-cost mines from Australia to Brazil.

Slowing Chinese steel output will be among factors that will cut the country’s demand for iron-ore by more than 200-million tons over the coming decade, says Citigroup.

Melbourne-based BHP Billiton expects Chinese steel production to reach as much as 1.1-billion tons in the mid-2020s, and plateau to 2030. Rio Tinto CEO Sam Walsh said this month that the Asian country would produce one-billion tons by 2030.

Crude-steel output in China surged twelvefold between 1990 and 2014 as millions of people moved from rural areas to cities and rising incomes fuelled purchases of homes, cars and appliances. Morgan Stanley forecasts yearly steel output in China will increase 4% to 855-million tons by 2020. Last year, China produced more steel than the US, Germany, Japan and Russia combined. China is the world’s most populous nation and became the second-largest economy in 2009. Even with growth slowing, it is expected to expand 7% this year, more than double the US.

Declining iron-ore inventories in China helped revive prices, which are up 26% from the low on July 8. The rally probably will not last, Morgan Stanley says, forecasting third-quarter prices at $50/t on average. Global supply will exceed demand in 2020 by 83.2-million tons, up from 58.1-million this year, the bank estimates.

Cliffs Natural Resources, the largest US iron-ore producer, said in April that the expanding global surplus made the $80-billion seaborne market a “horrible business”.

Earnings Stress

Perth-based Fortescue Metals Group probably saw net income tumble 85% in the year ended June 30, according to the median of 20 analysts’ estimates compiled by Bloom- berg. BHP Billiton’s net income for the same period is forecast to fall 43%. Rio Tinto said recently that earnings in the six months to June 30 fell 43% to $2.9-billion.

Australia, the largest iron-ore exporter, sees China’s steel production declining 1.5% this year on lower consumption growth and tighter environmental standards.

Even China expects demand for iron-ore to slow. Production will fall to about 807-million tons this year and continue to decline as steel consumption in China tumbles to 600-million tons by 2030, according to Li Xinchuang, deputy secretary-general of China’s Iron & Steel Association.

Perth-based Mount Gibson Iron, one of the higher-cost producers, is seeking base metals assets to diversify its business and has contingency plans to shutter existing iron-ore mines during a prolonged slump in prices.

“If steel consumption did drop, then the so-called midcaps are in for a world of pain,” CEO Jim Beyer says.