Terry McCrann: Iron ore is nation’s A-bomb in trade war

Australia has just one weapon in its armoury in any trade war with China – but any use of it should be measured and limited and clever.

Australia has just one weapon in its armoury in any trade war with China – but boy is it a powerful one, with a potency potential pervasively deep into and across China. It’s Pilbara iron ore.

It’s a weapon that can also be deployed in a variety of ways, depending on whether the government in Canberra wants to have its fingerprints on it, in order to send a very clear message to Beijing.

So far, the discussion about iron ore – easily our biggest export earner in total and easily our biggest earner from China specifically – has been couched around fear of China targeting it next.

That gets it completely arse-about: with iron ore and only with iron ore, WE have the power. Further and critically, we could actually make money out of wielding it.

If we cut shipments to China, by say, 10 per cent, the impact on China would be dramatic and catastrophic. On China. We, as in Australia, and as the specific exporters, would almost certainly make money.

Iron ore is our only weapon - but any use of it should be measured and limited and clever.

Yes, shipments would go down by 10 per cent, but the price would rocket by at least 20 per cent – it’s that sensitive. So, we’d get 120 per cent, by price, on 90 per cent, by volume. We’d sell 10 per cent less and get 8 per cent more dollars.

The big thing to understand is that right now – and probably for a few years yet – the window is open.

We could cut and there’d be little risk of Brazil’s Vale picking up the slack. Vale – and indeed the entire Brazil iron ore industry is in a chaotic mess. Decades of environmental vandalism has well and truly caught up with them.

Ten years ago it would have been different. Vale would have cranked up output to snatch the sales and the price would have fallen back.

Further and importantly there is little-to-zero prospect or high-quality African iron ore filling the gap: the potential mines there are at best five years away.

The government could most brutally and publicly exercise its export powers, to require a 10 per cent across-the-board cut in shipments – playing exactly and publicly China’s own game.

It could decide that the export ports were now a serious virus risk, so requiring stringent quarantine procedures which would unfortunately slow down shipments, effectively cutting them by 10 per cent.

The unions could decide to strike or go-slow in sympathy with workers in the wine and barley industries.

The miners – maybe ‘encouraged’ by Canberra – could decide that an extended closure was required over Christmas-New Year for maintenance and upgrading.

Indeed, whatever which way, we would also only be doing exactly what the ‘Third Man’ in the Pilbara Big Three – Fortescue’s Andrew ‘Twiggy’ Forrest – had demanded we do a few years ago: for BHP and Rio to cut shipments to boost the price and thereby dig Fortescue out of a hole.

It made no sense back then because Vale WOULD have picked up the slack; it can’t now.

It would also make no sense – and unlike an iron ore move, WOULD hurt us – to do exactly what the Chinese are doing: slap huge tariffs on our imports of Chinese consumer goods. That would punish OUR consumers.

There’s a further potential twist that could really turn the screw – cut shipments only to China, preserving supply AND normal prices to Japanese and South Korean buyers, making their steel industries more competitive against China.

It’s an appealing prospect - iron ore is our only weapon - but any use of it should be measured and limited and clever. Hurting China too much would be extremely dangerous.

Originally published as Terry McCrann: Iron ore is nation’s A-bomb in trade war