China unlikely to target iron ore in COVID blame game
China will put its own growth at risk if it targets iron ore in its growing campaign of economic coercion, given Australia’s dominant role in supplying the commodity to the world’s biggest steel producer and consumer.
Iron ore is potentially at risk as Australia’s largest trading partner targeted barley and beef exports over the past two days, ramping up pressure on Canberra to stop its campaign for a global investigation into the origins of the COVID-19 pandemic.
That caused shares of Graincorp to fall 7.5 per cent this week to $3.33, and AACo 4.1 per cent to $1.04. The active iron ore contract traded in Singapore was up 88¢ to $US86.15 a tonne on Tuesday.
China could also be seeking to punish Australia for levying duties of between 15 per cent and 102 per cent on Chinese makers of steel and aluminium. There’s no doubt the relationship between the iron ore price and China is crucial: “What has kept iron ore well bid is that we have seen steel production pickup in China,” said Vivek Dhar, commodity strategist at Commonwealth Bank.
Mr Dhar said China relies on Australia for 85 per cent of its iron ore imports. Given that dependency “they would be shooting off their own foot,” if they attempted to interfere with the iron ore market, he said.
There are other more easily replaceable metals that could be more at risk, such as coal, he warned. Metallurgical coal is used to produce steel.
Lachlan Shaw, head of commodity research at NAB, made a similar point about the potential vulnerability of met coal exports to China. “There’s talk of met coal exports from Australia into China being slowed down again,” he said.
Last year, China ramped up environmental checks and held shipments at some ports by up to 45 days after imposing restrictions in January. Both China and Australia denied the delays were politically motivated.
But this time around “obviously there is a strong diplomatic rejection of Australia’s suggestion,” for an investigation, said Mr Shaw. The growing speculation over tariffs “signals that relationship is getting more complicated and delicate”.
For the iron ore market and investors, while the political backdrop will be something to watch, the focus is likely to remain on the potential benefits from another round of large-scale stimulus within China, barring political interference.
“The market has been focused on, and is right to focus on, stimulus from China,” said Mr Shaw.
He is looking at local government bond issuance in China as a guide. Year-to-date issuance had already hit 1.18 trillion RMB ($260 billion) by the end of April, a 60 per cent increase on last year.
Local government bond issuance is expected to rise to 4 trillion RMB by the end of the year, he said, which would be in line with post-GFC stimulus.
“Some of that will go to cover expenses,” he said. “But we are still expecting massive stimulus into the Chinese economy. A big portion of that will park in infrastructure and within that bucket, there’s a range of things – metro, railway systems and 5G for example.
“It’s going to be an important driver of activity as we go through the year,” he said. “I think that steel demand in China will accelerate quite notably through the year.”
For the iron ore price, the prospects appear relatively bright. UBS estimated the big four iron ore miners shipped 72.8 million tonnes in April, up 8 per cent year-on-year.
Fortescue told investors on Tuesday that demand has been robust in China and prices have been resilient with drawdowns of iron ore stocks at Chinese ports.
“I don’t see the iron ore price falling dramatically this year. the fundamentals in China are very well balanced and tilting to the tight side,” Mr Shaw said. “It suggests that maybe the price can hold in the $US75 to $US90 range for the rest of the year.”
Source: Australian Financial Review