Having just looked at the prospect of a flat (at best) steel consumption growth rate from China, the next question for many will be: what does this mean for iron ore? Because pretty much all of the projected increase in iron ore demand is expected to come from China:

And there’s a lot of new iron ore production capacity coming online in the next few years, even if enthusiasm has recently waned a little.

Interestingly, it turns out that the iron ore spot price forward does in fact seem to be predicting flat steel demand growth from China, right up to 2020.  That’s according to Citi’s iron ore analysts who published a mammoth note last month:

Citi’s analysts aren’t overly keen on the flat demand growth scenario, as you can see from the chart above, but they’ve dug into it enough to address the big question for investors in iron ore producers, which is: what about the cost curve?

That is, will all this new iron ore production capacity that’s coming online be profitable? And if not, which ones won’t make the cut?

This quickly becomes a question of the domestic Chinese iron ore producers, which is something we’ve looked at before and won’t go into here. The tl;dr version is that a big chunk of Chinese iron ore capacity is basically the swing producer, with its collective size providing an effective floor at *roughly* the $120/tonne mark. Or, has done in the past.

However, as it happens, Citi has a handy “when to worry” summary after crunching a flat Chinese steel demand scenario and the domestic steel producers’ price points and the new iron ore projects.

The good news is that it would require just about every possible new iron ore project going ahead before it gets really ugly for a lot of those selling to China:

When is it time to worry?
If all probable and possible projects come to fruition i.e. all major West African projects which require major capital investments and the construction of large railways and pipelines succeed in doing so and then Chinese steel production remains flat on 2012, this is when we should start to worry; high-cost Chinese capacity would be eliminated in the next few years, with low-cost Chinese capacity eliminated by 2017, followed by a surplus in seaborne supply.

On the other hand, that scenario is still in bullish land according to the Nomura analysis, which says flat steel demand is probably being generous and suggests that a reduction in demand is not at all out of the question.  Oh, and their analysis is flat on 2011 consumption, not (projected) 2012 consumption, which Citi expects will be 6.7 per cent higher than in 2011.

More from Citi here.