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Australia increasingly reliant on China’s demand for iron ore

Escalating political tensions between Canberra and Beijing have done little to dampen the value of exports, with China accounting for more than 40 per cent of goods shipped in May, on the back of record demand for iron ore.

The latest economic chart pack from the Reserve Bank shows a striking lack of diversity in Australia’s trade ties and highlights an increasing dependence on iron ore sales to China.

China made up about 10 per cent of goods and services exports in 2005, well behind Japan, before spiking to 25 per cent at the height of the last mining boom and continuing to climb above 35 per cent this year.

The Industry Department forecast iron ore exports to grow from $103 billion in 2019-20 to $149 billion in 2020-21, on the back of record prices and growing volumes, before falling back to $113 billion by 2022–23.

Iron ore sales to Chinese steel mills lifted 20 per cent to $12.6 billion in May, accounting for about 75 per cent of the goods exports to China.

The strong sales pushed China’s portion of total goods exported by value above 40 per cent for the fifth time this financial year and the 10th time on record, according to Australian Bureau of Statistics data.

“The surge in prices reflects the strong demand for steel products in China and other advanced economies, as the global recovery continues to pick up pace coming out of the COVID-19 pandemic,” the Industry Department said.

“As Chinese mills capitalise on increasing demand for steel products, this demand pressure has flowed through to materials such as iron ore.”

Demand for Australia’s iron ore has seen the federal budget bottom line improve by billions of dollars over recent years, and current prices suggest an additional $12.5 billion tucked away in the May’s budget’s sensitivity analysis if prices remain above $US150 a tonne as is all but guaranteed.

Analysis by The Australian Financial Review suggests if prices average $200 a tonne over the 2021-22, the budget could be $20 billion better off than forecast, wiping 20 per cent off the forecast cash deficit.

Australia supplies more than half the world’s iron ore followed by Brazil, which supplies about 20 per cent, however recent issues in Brazil have constrained supply and pushed prices above $US200 a tonne.

Australia’s dominant position in the market combined with Brazil’s supply challenges, which are not expected to be fully resolved until late 2022, have left China with few alternatives to slake its thirst for steel.

Beijing last year imposed trade restrictions on Australian lobster, beef, cotton and timber exports, placed tariffs of up to 212 per cent on wine and 80 per cent tariffs on barley, and blocked coal shipments.

It has made clear that it is also looking for alternative sources of iron ore, though these options are still a long way into the future.
Source: Australian Financial Review

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