Australia’s reliance on China buying lots of our iron ore puts us right where Beijing wants us
Australia’s careful and sensitive diplomacy with China took a sharp turn in a new direction last year at the height of the Covid-19 pandemic.
Beijing’s secrecy and revelations of its bungled handling of the early outbreak, which plunged the entire world into chaos, saw pressure mount for action from the international community.
Those calls for an independent investigation into the origin of coronavirus were led by Australia, which came as a surprise to many given the softly-softly approach that had dominated Canberra’s relations with the superpower for decades.
Retaliation from the easily offended nation was swift, with a bitter trade war erupting on all but one of the country’s major exports.
And that single act of mercy largely saved Australia’s economy from a much deeper destruction during Covid-19.
An extremely lucrative relationship
Some 15-odd years back, China began its rapid transformation from a light industrial to a heavy industrialisation economy, expanding its manufacturing sector with a particular focus on machinery, cars and ships.
That shift required huge amounts of steel, which is made from iron ore.
The country’s steel sector, owned almost entirely by the Communist Party, quadrupled in size in the space of a few years.
China didn’t have access to high quality iron ore of its own or from existing trade partners, and needed an absolutely mammoth amount of it to meet skyrocketing demand.
Beijing quickly became Australia’s biggest customer of the mineral.
Back in 2000, it was buying about 70 million tonnes of the stuff, a tiny fraction of the 445 million tonnes it purchased from Australia in the first six months of this year.
In the 2020-21 financial year, iron ore exports were overall worth about $149 billion, and much of that came from Beijing’s pocket.
Now, China accounts for more than 80 per cent of Australia’s exported iron ore.
That significantly lucrative arrangement has served the country’s coffers well and the authors of successive government budgets have come to rely on it.
Iron ore is not a cheap product. The price peaked at US$229.50 in May. Yesterday it was selling for US$94.70 a tonne.
As a trading partner, Australia is in the bad books with Beijing after the Commonwealth-led calls last year for an independent investigation into the origins of Covid-19.
Countless sectors, from barley to wine, have been punished with tariffs, import embargoes and the disappearance of demand as a result.
Iron ore remained largely unaffected though, but China looks to be increasingly resentful of its reliance on the mineral and its imports are beginning to taper.
When so many other export markets are suffering, and the economy itself teeters on the edge of another recession, there’s a growing importance to protect that last remaining major income source.
Dwindling demand will hurt
Right now, China buys the vast majority of its iron ore from Australia.
They can get some of it from elsewhere, including the smaller but cheaper market of Brazil, but the high quality of the stuff dug up here is unparalleled.
Demand is beginning to slow as China’s economic priorities are tempered by global pressures, the Covid-19 crisis and finally, perhaps most significantly, the woes facing its biggest property developer, Evergrande.
“Evergrande’s collapse will reverberate throughout China’s real estate market,” Professor Robert Powell from Edith Cowan University wrote in an article for The Conversation.
“Investors and lenders will be more cautious, potentially resulting in a credit crunch. This could severely dampen property development, and thereby demand for construction materials including steel, made using mostly imported iron ore.”
Beijing is also keen to boost its own iron ore production, as well as diversify its purchasing with other sources.
China is also increasing efforts to recycle scrap steel which now accounts for about one-fifth of its crude production.
And finally, the Communist Party is undergoing reforms that could see it ease the era of explosive economic growth in favour of something smaller but more sustainable.
“It doesn‘t take much shift in demand to really see a big shift in terms of pricing,” Michael Thielliant, senior economist at Capital Economics, said in a market update in May.
“Once that demand appetite, or concerns over demand, increases, we could see iron ore prices correct, and our expectation is that it’s likely to correct further. The question is just on timing.”