China’s trade dispute with Australia has not extended to iron ore … yet
Australia’s relationship with its biggest trading partner, China, has deteriorated rapidly this year.
China is working on a major African iron ore mine that would add 150 million tonnes to global supply
Trade experts say China can only maintain its current aggressive trade stance for a short while before damaging its own economy
As Australia has taken a firmer stance on issues such as China’s South China Sea incursions and investigations into the source and handling of the COVID-19 outbreak, the nation’s biggest trading partner has hit back through hip pocket diplomacy.
Huge tariffs on Australian barley, bans on some Australian beef, restrictions on coal and an investigation into wine are just some of the shots being fired across Australia’s bow.
“The mishandling of the virus in Wuhan with the World Health Organization has caused China to be quite concerned about its governance and you know, the best form of defence is attack sometimes,” explained economist and trade expert Tim Harcourt, from the University of New South Wales.
But the elephant in the room is iron ore, which is a product China desperately needs for the massive infrastructure and housing projects that are providing the stimulus to keep the world’s second-biggest economy afloat.
China’s trade attacks have so far steered clear of Australia’s biggest export, the value of which is set to pass $100 billion this year.
WA’s iron ore mines may save Australia
Machine loads iron ore
Western Australia’s decision to keep its iron ore mines running during the COVID-19 pandemic may have helped save Australia’s economy from a much worse decline.
Despite all the tension between the two countries, iron ore sales to China in the first half of 2020 were actually up more than 8 per cent, with the added bonus for Australia of a higher price.
However BHP, Rio Tinto, Fortescue and Roy Hill are heavily leveraged to China, and would be extremely vulnerable if Beijing decided to give iron ore the same treatment as, for example, barley.
But would it? Indeed, could it?
“We actually supply China with about 60 per cent of their total iron ore consumption,” observed Bell Potter analyst Giuliano Sala Tenna.
“So, at the moment, the status quo will be maintained only because we’ve seen with Chinese foreign policy that they don’t tend to do things to their own detriment.”
Notwithstanding that, as China looks to make life harder for Australia, iron ore is already on its radar, with new customs protocols which, if enforced, could leave selected shipments stranded at the docks.
Helen Sawczak, who finished up last month as CEO of the Australia-China Business Council, warns that even though resources are lower down on the list of targets, they are not immune.
“I wouldn’t take anything for granted,” she told The Business.
“I think the risk is heightened.
“Obviously companies will be reassessing their risk factors, and the political risk associated with working with China will obviously have a heightened significance at the moment.”
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Longer term, Giuliano Sala Tenna sees even bigger threats to the iron ore trade.
“We’ve seen China invest into the Simandou [iron ore] project in Guinea,” he noted.
Iron ore out of bounds
China has targeted everything from Australian barley to coal, wine to tourists and students, but it isn’t likely to come after our biggest export, iron ore. Ian Verrender explains why.
“Now, that has a potential production of 150 million tonnes per annum. That will take five to 10 years to ramp up, but that could significantly put downward pressure on the iron ore price.”
Australia’s arch ore rival — Brazil’s Vale — is also on the way back after a collapsed tailings dam smashed its output.
But economist Tim Harcourt does not see these new developments as a major threat.
“Brazil’s been completely hammered by coronavirus and had governance issues at the best of times, even without COVID-19,” he said.
“China’s record in Africa is pretty mixed, as it is in PNG and the Pacific, closer to Australia.”
China will ‘have to walk all this stuff back’
Ms Sawczak also noted that Australian businesses working in China were well aware of the sovereign risk.
“Australian companies, we’ve had this threat with China for many years,” she said.
China’s beef ban is straight from Beijing’s punishment playbook
The Morrison Government seems to be betting that all it needs to do is hold its nerve and hold the line when it comes to China’s trade threats.
“It’s something that Rio Tinto dealt with, it’s something that Crown Casino has dealt with, but it seems that things are very much heightened this week.”
Another consolation for local producers, if you can call it that, is that China’s trade hostility is not restricted to Australia.
It is also at war, in a trade sense, with a large chunk of the world, and exporters in places as far flung as the United States, Canada, India and Europe are also feeling the Beijing blowtorch.
Mr Harcourt does not believe this level of aggression can be sustained for long before it hurts China’s economy more than it hurts the targets of its wrath.
“Ultimately it’s not going to work,” he argued.
“Ultimately China’s going to get back to the Deng Xiaoping reform path that it was on and they’ll probably have to walk all this stuff back.
“So, we are just seeing that process acted out in terms of our own bilateral relationship.”
Ms Sawczak says things aren’t as bad as they might appear, and she is hopeful that relations will normalise sooner rather than later.
“We’re still reaching records in bilateral trade between Australia and China, so Australian companies still remain cautiously optimistic about the great potential of the China market.”