There’s one thing we have that China needs – but the Asian superpower is now putting a plan in place which could devastate the Australian economy.
China is determined to crush Australia’s iron ore cash cow.
On Tuesday on the Australian Stock Exchange, large iron ore miners drove prices to record highs.
This feat came about because of two factors. Iron ore is trading just off record highs and the Australian dollar is much lower than it ever has been during such previous booms. This has led to record fat margins for miners.
But, even as this trade hits new highs, there are clear signs that good times are on notice. Indeed, China is determined to crush iron ore prices in both the short-term and the long, and there are good reasons to conclude that it will succeed sooner rather than later. There are three reasons why.
The first is that global supply is lifting after several years of extreme tightness. The most important source is the rebound in Brazilian production which was badly damaged following its great dam collapse in 2019.
Brazilian exports are on the up and will be 60 million tonnes higher than the lows following the accident by the end of the year. Within 12 to 18 months, they’ll be fully repaired and running full tilt.
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Brazil is on track for a healthy 2021 for iron ore exports.
China is also investing heavily in its own mines again. This happens automatically when iron ore goes above $120. But it’s being encouraged by policymakers as well. This will deliver tens of millions of new tonnages through this year and next.
Australian production has been held back over the last six months by problems at Rio Tinto’s major port. But those issues are now resolved and it has big new mines coming on stream too.
So, supply is going to lift in the second half of this year and keep on lifting right through 2022.
The second reason why China is set to succeed in its endeavour to crush iron ore soon is that demand has peaked. For the past nine months, China has been tightening credit to commodity-intensive sectors of property and infrastructure construction.
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Demand for iron ore is high in China which has been beneficial for Australia.
There are lots of signs that the sectors are now slowing. These include lower floor area starts for their forests of empty apartments. And the local government borrowing which drives investment in roads, railways and bridges is well down on last year. Together, these two sectors comprise 70 per cent of Chinese demand.
A BHP freight train carrying Australian iron ore to port. Australia ships around a third of its overall exports to China.
The third reason that China appears close to achieving its goal of lower short-term iron ore prices is its attempts to regulate markets. In recent months China has killed its own steel exports to lower prices at home; it is forcing steel mills to cut production, and it has slammed its futures markets and punished speculators.
None of these can work by itself. But together they add up to polished jackboot stomping on many of the drivers of strong iron ore imports. Moreover, the many measures are unprecedented and speak to desperation to kill the iron ore price ASAP. Doubtless in part this is because Beijing is so annoyed that its trade war on Australia has badly backfired.
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Workers prepare ore from Australia to be transported from a port in Tianjin, China. Picture:
It is widely known that China plans to substitute Australian iron ore in the long run by seeding African mines and dramatically lifting its steel scrap recycling.
Judging by the runaway iron ore miner share prices on the ASX, it is less widely understood that the Chinese dictatorship is tightening a noose around iron ore right now.
It is likely going to succeed in choking off the oxygen before very long.