Why Australia’s iron ore export boom to China is a double-edged sword
For much of Australia’s history, it has been said that our nation’s economic fortunes have rested on the back of the sheep. With wool being Australia’s main export from 1871 to the 1960s, when wool prices were at the top, our economy sometimes followed suit.
Fast forward 60 years and Australia is just as dependent on exports for its economic prosperity as it was over a century ago. Except this time around, the nation’s economic future no longer rests on the back of a sheep, but on a bulk carrier the size of a football field bound for China.
When China entered the world’s first lockdown in January last year, it looked like Australia’s goose that laid the golden egg at last would have fulfilled the conditions that would be its end.
But in the months that followed, a construction-led Chinese government stimulus package not only stabilized iron ore prices well above the US $ 55 per tonne assumed in the 2019-20 federal budget, but also also put prices on track to a new record.
By the time prices peaked at US $ 226 per tonne in May, iron ore had provided Australia’s economic growth figures and the federal budget with a huge boon.
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In 2011, during the previous iron ore price spike at the height of the mining boom, the annual value of iron ore exports reached $ 58.4 billion.
To put into context the current exceptional iron ore prices for the economy, Australia exported $ 64.1 billion worth of iron ore in the past five months alone.
With the period of the peak price recorded in May not yet covered by figures from the Australian Bureau of Statistics (ABS), it is likely that the current monthly record value of iron ore exports of $ 14 billion will again be outdated.
Despite the closure of international borders which costs the Australian economy $ 47 billion a year in spending by foreign tourists, soaring iron ore prices are generating this shortfall and more, in just a few months.
But as GDP numbers come to life and Treasurer Josh Frydenberg revel in the country’s AAA credit rating, behind the scenes, the long-term prospects for the iron ore boom that have helped make these two possible events seem increasingly fragile.
Sino-Australian trade war
Before the pandemic, China was relatively happy to continue buying iron ore from Australia. However, since the start of the pandemic, relations have deteriorated considerably.
Beijing has stepped up its targeting of Australian exports through punitive trade actions, in part following pressure from Prime Minister Scott Morrison for an investigation into the origins of the coronavirus pandemic.
As relations go from bad to worse, Beijing’s desire to find a more reliable and compliant source for the key commodity and engine of economic growth continues to grow.
With steel production in China currently at record highs and Beijing relying heavily on construction as the foundation for its economic recovery, the last thing Beijing wants it to pay the highest price for is ore. iron.
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Due to high commodity prices, Beijing has already implemented a number of different policies to stamp out speculative trading with the aim of driving down prices.
On Tuesday, China’s National Development and Reform Commission (NDRC) announced that the state planner and market regulator have jointly launched an investigation into the iron ore spot market. The investigation is expected to target hoarding and speculation in the iron ore markets.
While these measures have the potential to bring prices down significantly in the short term, it is the long-term message they send that should be of much more concern to Australia and the federal budget.
Beijing seeks to continuously diversify its sources of iron ore, both to limit its exposure to high market prices and to ensure it has a continuous supply of raw materials, even as tensions with the United States and their allies degenerate into crisis.
For years, China has attempted to develop alternative sources of iron ore, from mines in Brazil to many attempted projects across much of Africa.
As Beijing’s seemingly insatiable thirst for construction-led economic growth continues, none of these other projects have come to fruition as a source of iron ore that may even begin to rival China’s relative monopoly. Australia on China’s maritime supplies.
But as geopolitical battle lines are drawn and tensions continue to escalate in Taiwan, Beijing now has a renewed sense of urgency to find an alternative to Australian iron ore much sooner than it would have. thought otherwise.
China has already reopened some of its own iron ore production capacity and is ramping up production.
The push to develop the massive Simandou iron ore deposit in the West African nation of Guinea is expected to top the list of projects, as Beijing tries to secure future supplies and drive prices down.
How successful will Beijing be in finding alternatives to Australian iron ore is an open question. Historically, they have struggled to build an alternative supply chain, but things have changed a lot since then.
With tensions rising and prices close to all-time highs, an alternative to Australian iron ore has gone from what would be good for Beijing to something that arguably comes close to a necessity.
For now, Australia will be making hay while the sun is shining, capitalizing on the billions of dollars bounty iron ore provides to the national economy and the federal budget.
But in the long run, if Beijing finds another major source of iron ore, Australia could have a serious problem.
Tarric Brooker is a freelance journalist and social commentator | @AvidCommenter