"Chinese steel production growth is unlikely to match 2013’s level in the near future, and China’s incremental demand for iron ore will see a downtrend,” Fitch Ratings predicted this week.

"The total reliance by global iron ore miners on Chinese iron ore demand means that any failure to contain iron ore supply expansion to match China’s slowing steel production growth can lead to persistent iron ore price weakness,” advised Fitch analysts Su Aik Lim and Laura Zhai.

Despite strong political intention by China’s central government to curb the nation's excessive steel capacity, much of China’s steel production has been built in the past decade. “As such, market forces have to be the key driver for industry consolidation, especially since the local governments of smaller cities lack the motivation to close steel plants just to curb national supply—given the wide-ranging impact of the steel plants on their economies,” the analysts observed.

Nevertheless, “China remains interested in investing in overseas iron ore projects, and this will add to competition in iron ore supply,” they suggested. “The longer-term outlook for iron ore may, however, be supported by a revival of demand from Europe and Japan.”

In its analysis, Fitch observed, “Poor profitability which results in a strained financial position has been the most effective deterrent against capacity expansion.” In the steel sector, 2013 capacity has increased only by 20 million metric tons, compared with over 50 million metric tons in the last three years.

"Fitch believes a positive trend in ratings is unlikely, as an essential factor would be a general improvement in industry conditions,” said the analysts. “This may happen when there is a meaningful containment of capacity expansion through effective regulatory policy or by market forces. Alternatively, demand recovery in developed economies—especially for auto demand—could spur growth and directly support demand for metals, while also adding to China’s growth prospects.”

However, Fitch noted, metals such as aluminium “still face supply surges, enjoying double-digit demand growth, and the highly profitable power integrated aluminium producers stand to benefit through expansion.”

Prices for aluminium have fallen by 24% from the post-2008 high, despite China’s substantial demand for the metal which has increased by 72% between 2007 and 2012. The outlook is the same for iron ore where China’s 58% increase in consumption did not deter a substantial decline in prices.

"The country’s demand growth for these metals will wane over the next five years,” the Fitch analysts cautioned, “and therefore any persistent market imbalances in these metal markets can no longer depend on China’s demand growth.”