The Reserve Bank of Australia has flagged a likely increase in near-term volatility for mineral exports and prices because of uncertainty surrounding China's growth outlook and its decision to cut steel production.
A focus on environmental protection and cutting air pollution also raises the prospect that such disruptions could become more frequent in future, the RBA said on Friday.
"In so far as these policies affect the supply side as well as demand side of commodity markets - through their effects on China's domestic production - they create uncertainty in both directions around the trajectory for the terms of trade," the RBA said in its quarterly monetary policy statement.
China has announced targeted reductions to steel production in 28 cities as well as in major steel producing regions over its winter months in an effort to curb air pollution.
The volatile nature of its demand has been reflected in record iron ore imports by the country in September, followed by a 23 per cent slide in imports in October.
As a result, iron ore prices have see-sawed between $US55 and $US65 a tonne in recent weeks.
The RBA said there are a number of reasons to expect that Chinese steel demand is near its peak, with projections for population falls over coming decades and a likely slowing rate of urbanisation.
China's steel intensity, or the amount of steel used per person, has jumped with industrialisation and urbanisation since the 1990s but is likely to peter out as the economy shifts away from heavy industry towards services.
Demand for Australian iron ore and coking coal as inputs could be further affected if China increases the share of its production made from scrap metal, the RBA said.
China's ratio of scrap steel consumption currently stands at 11 per cent, compared to over 50 per cent in the European Union and 70 per cent in the US.
The Chinese government is targeting tripling this ratio over the next decade.
Prices for Australia's top two export earners - iron ore and coal - are also set to be impacted by supply-side developments, particularly increased global supply for iron ore at home and from Brazil.
While not much additional capacity is expected for coking coal over the next few years, the global seaborne market is small, making the spot price vulnerable to supply-side disruptions, RBA said.
