Investing.com -- Iron ore markets are facing a complex set of forces that could shape prices in the coming years, with China’s latest round of supply-side reforms and the upcoming ramp-up of the massive Simandou project in Guinea standing out as key factors.

Analysts at Citi Research believe China is likely to move ahead with what they call “supply side reform 2.0,” leading to cuts in steel production and exports.

While this could be beneficial for steel producer margins, the impact on iron ore prices is less straightforward and depends more on demand than production levels.

A reduction in steel output from China would typically suggest lower iron ore consumption. However, Citi Research estimates that a 50 million tonne decline in China’s steel production would reduce global iron ore demand by only around 15 million tonnes, representing just 1% of the 1.6 billion tonne seaborne iron ore market.

This is because steel production outside China is generally less dependent on iron ore. Even as more steel is manufactured in other countries, the overall impact on iron ore demand may remain limited.

Iron ore is even more important to India than to China, a country that has been expanding its steel production rapidly.

In the short term, iron ore prices have shown a stronger correlation with steel producer margins than with actual steel production rates.

Citi Research notes that if production cuts in China support steel margins globally, this could help sustain iron ore prices.

Additionally, the premiums for higher-grade iron ore have historically moved in line with steel producer margins.

If margins improve, the price gap between high- and low-grade iron ore could widen, offsetting any decline in base iron ore prices.

While the potential for lower steel production in China is one factor, Citi Research highlights the expansion of the Simandou mine in Guinea as a more immediate risk to iron ore prices.

Simandou is set to begin producing ore at the end of this year, with a 30-month ramp-up period. Once fully operational, it will add 120 million tonnes of new capacity—equivalent to more than 7% of the current seaborne iron ore market.

This scale of capacity expansion has not been seen in over a decade and could weigh on iron ore prices over the next few years as the additional supply enters the market.

The coming months will be critical for assessing how these factors play out. If China proceeds with its supply-side reforms, steel margins could improve, supporting iron ore prices in the medium term.

However, the longer-term outlook will likely be shaped by the pace at which Simandou ramps up production and how demand trends evolve across key steel-producing regions outside China.