China holds BHP, Rio Tinto, Fortescue Metals and Australia hostage

Australia’s prosperity is now totally dependent on China, the major buyer and price setter for the almost one billion tonnes of iron ore we shipped north over the past year.

Australia shipped almost one billion tonnes of iron ore to the Northern Hemisphere for the year.

Fortescue and Rio Tinto have joined BHP in detailing in rich black ink and massive multibillion-dollar dividends how Australia’s prosperity is now totally – and I mean totally – dependent on China.

It is also – or should be – sobering to add this also means it is China which is effectively underwriting the multibillion-dollar cheques that state, and especially the federal government, have been writing out with such gay abandon over the past 18 months in this time of the virus.

Yes, right now that spending has just been whacked on the national credit card – with another few billion just added for NSW’s lockdown. It hasn’t had to be raised from taxpayers or even really borrowed, thanks to the Reserve Bank buying government bonds.

But hey, the now permanent federal budget deficit and the resultant ever-escalating debt – not just into the 2030s but right through them and then through the 2040s, 2050s and beyond – is a problem for tomorrow’s taxpayers and tomorrow’s politicians.

And all with the assumption that nowhere on that journey will we ever face a literally existential national crisis as a consequence, because China will continue to see its central role on the planet as keeping 26m Australians in the comfort and standard of living they’ve come to expect as a right.

All I can say is: Hmm.

Australia shipped almost one billion tonnes of iron ore to the Northern Hemisphere for the year.

All three of our Big Three Pilbara iron ore miners have now reported their production and sales numbers for the year.

Collectively, they shipped off 874m tonnes of Western Australia’s rich red dirt to the northern hemisphere. I’ve annualised the Rio figures, which were only for the June half.

Add on the other minor producers and nearly one billion tonnes of WA got shipped north. I continue to ponder what this is doing to the planet’s balance.

One thing I can be sure of is that the cheques – actually, these days computer keypad strokes – sent south from the northern hemisphere are doing wonders for a lot of our balances.

The trade balance, the broader current account balance – now in surplus for the first time since the 1970s – the balance sheets, profits and dividends of the Big Three in particular, and the budget balances of the federal and WA governments.

Amend that last point. Yes, the WA budget will be in the black – the only one in the country and thanks entirely to the iron ore royalties; nothing the state government has actually done.

But obviously not the federal budget which will still be $150bn or so in the red for 2020-21; it’ll just be somewhat smaller than it would otherwise have been.

We don’t sell all our iron ore to China; just the overwhelming majority of it. But it’s the China trade that sets the prices that everyone pays for our iron ore.

The industry was actually built on guaranteed sales to Japan – that was needed to get the bank loans to actually build the first mines.

But those numbers are minuscule compared to today’s. And minuscule compared to how everything in our economy and our prosperity is now totally reliant on China continuing to keep the music playing.

More specifically, to keep making steel: Fortescue told us China made 563m tonnes in the June half. Annualise that and you get 1126m tonnes or about 60 per cent of all the steel made in the world each year.

And more specifically, to continue to buy its iron ore from us – not because it “likes us” but because it can’t get it anywhere else. For the moment.

Fortescue is 100 per cent long iron ore and China got $34bn of revenue.

Rio is 66 per cent long iron ore and China got $60bn of revenue (annualised).

BHP got $51bn revenue. So $145bn between them.

Nice while you can still get it.

Originally published as China holds BHP, Rio Tinto, Fortescue Metals and Australia hostage