China’s prolonged economic slowdown is emerging as a growing headwind for bulk commodities, with UBS and Commonwealth Bank both warning that iron ore prices face increasing downside risks as demand weakens and new supply comes online.
Despite a resilient performance so far this year, iron ore prices are looking increasingly vulnerable. UBS highlights a deterioration in China’s domestic demand indicators, pointing to weakening consumption and softening activity across construction and manufacturing. The property sector, a major driver of steel demand, continues to contract, while infrastructure spending has failed to provide a meaningful offset. CBA’s analysis reinforces this view, noting that China’s steel output has fallen sharply as demand from construction remains under pressure.
The weakness in property is particularly significant. New construction activity, the most steel-intensive segment of the sector, has declined for several consecutive years, signalling structural rather than cyclical demand challenges. With property and infrastructure together accounting for the bulk of China’s steel consumption, both banks see limited scope for a near-term rebound in iron ore demand.
On the supply side, risks are also building. UBS flags rising port inventories and increasing pressure on steelmakers’ margins, while CBA points to the looming start-up of the Simandou iron ore project in Guinea as a material source of new seaborne supply. That combination raises the risk of oversupply just as Chinese demand momentum fades, increasing the likelihood that iron ore prices slip below the US$100 per tonne threshold.
While recent price resilience has been supported by temporary supply-side frictions — including disruptions to trade flows — both banks caution that these factors are unlikely to provide lasting support. UBS also extends its caution to other industrial metals, warning that fragile domestic consumption in China presents near-term macro risks for base metals more broadly.
Looking ahead, UBS suggests Beijing may be holding back on major stimulus until 2026, when the 15th Five-Year Plan comes into effect. Until then, policy support is expected to remain measured, leaving commodities exposed to China’s underlying slowdown. That backdrop challenges the sustainability of recent gains in mining equities and bulk commodity prices into next year.
—
The more cautious outlook from UBS and CBA on China and iron ore carries clear implications for Australia’s macro and FX backdrop. Iron ore remains Australia’s single most important export and a key driver of national income, fiscal revenues and terms of trade. A sustained move below US$100/t would represent a material negative shock relative to recent assumptions.
For growth, softer iron ore prices would weigh on mining profits, capex intentions and royalty receipts, particularly in Western Australia. While Australia’s economy is more diversified than in past cycles, the mining sector still plays an outsized role in income generation. A weaker commodity backdrop would therefore tilt risks toward slower growth in 2026, especially if China delays meaningful stimulus until the launch of its 15th Five-Year Plan.
For the Reserve Bank of Australia, a deteriorating external environment would reinforce the case for patience. Lower commodity prices would act as a disinflationary force via weaker income growth and reduced pricing power, potentially limiting upside risks to inflation. A combination of weaker steel demand, rising global supply and delayed Chinese stimulus would leave the AUD vulnerable, especially against the USD and JPY
