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Australia’s iron ore exports to China look safe for now

China’s iron ore demand is expected to remain at record levels this year off the back of a government infrastructure spending spree, before declining in 2021. Analysts, however, warn Beijing is looking for long-term alternatives to Australian imports.

Xu Xiangchun, chief information officer at Chinese research firm MySteel said more than half the demand was being driven by steel products used in construction, such as reinforcing bars called rebar.

On the flipside, the appetite for steel plates and other products used in manufacturing was declining because China’s factories were producing less goods to sell to struggling overseas economies.

“There has been a decrease in export demand and the domestic market is also weak because individual consumption is affected by shrinking incomes and weaker company operations,” Mr Xu told The Australian Financial Review.

“But still, the drop in steel demand from manufacturing is offset by the increase in the construction sector.”

MySteel said China’s steel demand shrank by 5 to 6 per cent in the first half of the year, but would pick up in the next six months with the launch of more government infrastructure projects.

In May, Beijing’s stimulus measures, announced in its annual “work report”, included 3.75 trillion yuan ($800 billion) in special government bonds that would help fund infrastructure spending. Crude steel output remained strong in June and iron ore prices rocketed through $US100 a tonne in May after coronavirus disrupted Brazil’s iron ore supply chain.

MySteel said China’s total steel demand would only decrease by 1 to 2 per cent in 2020 even after the country’s economy was forced to shut down for almost two months. However, it would be weaker in 2021 when infrastructure spending is expected to decline following this year’s stimulus measures.

Mr Xu said China still needed Australian iron ore but it could look to diversify to other sources, such as Brazil, once its current supply issues were resolved. Australia’s top export to China is considered safe in the short term from the current political tensions, unlike other products such as beef, coal and wine. However, that could change.

“There is a likelihood of Chinese steel mills switching to Brazilian iron ore if Australia is perceived as being difficult by most of the Chinese public. We can’t exclude that possibility,” he said.

The boom in China’s infrastructure spending is also being partly offset by weaker manufacturing. Global exports orders are in a slump, and consumers in China, too, are buying fewer products that use steel such as home appliances and automobiles. Heavy flooding in China’s south has also disrupted work on some building sites.

Still, China’s steel demand this year has so far defied a 6.8 per cent first-quarter contraction in the world’s second-biggest economy.

Li Xinchuang, president of the China Metallurgical Industry Planning and Research Institute, said this was also being driven by government initiatives to create 9 million jobs. Excavator sales, a key indicator of activity in the construction sector, were robust. China’s 25 top excavators reported a 68 per cent increase in sales in May due to mainly domestic demand, government data shows.

“Steel demand this year will remain stable at a high level. There could be a slight drop or a slight increase. The decline of steel demand in the manufacturing sector will be offset by the increase in investment-related [infrastructure] steel demand,” Mr Li said in an interview.

In December, the government consultancy predicted crude steel output in 2020 would ease from a record high last year to 981 million tonnes.

However, he was bearish on China’s long-term appetite for Australian iron ore. Australia currently accounts for about 60 per cent of China’s iron ore imports, compared with 20 per cent for Brazil. While this would not change in the short term, Mr Li said China was investing heavily in new iron ore projects in Africa and other nations. Analysts, however, said it would be years before they produced volumes to rival Australia’s.

“It is important for China to diversify our iron ore supply,” Mr Li said.

Asked if this was a real threat to Australia because the new mines would take years to develop, he said: “It’s true but if China has made this huge investment in overseas mining projects then that’s a long-term change in our iron ore supply structure. This will hurt Australian iron ore miners interests in the long run.”

Analysts in Australia have rejected suggestions in some Chinese state-run media reports that political tensions could hurt supply.

Even the hawkish Global Times newspaper has admitted China needs Australian iron ore. “There is indeed some truth in the argument that curbing Australian iron ore imports would have negative impacts on China’s economy”, it said in an article published last week.
Source: Australian Financial Review

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