Iron ore feels China squeeze as prices plummet

The already very low prices have taken another turn after China amped up the aggression towards Australia.

China’s bullying tactic is finally catching up with Australia’s iron ore industry, sending the commodity’s price plummeting on Friday.

Iron ore prices are down by about 30 per cent since their record high of $US237 ($A317) a tonne in May, now at a mere $US167 ($A228), at the time of writing.

So far, it’s been bad news for all of August, with iron ore prices trading consistently around $US172 (A234) for the last three weeks.

In May, China vowed to bring down the cost of the popular export because Australia’s $32 billion iron ore industry was “profiteering” off excessive prices.

The communist nation threatened “economic pain” in Australia by wiping off $32 billion from our economy through buying less in a nationwide five-year plan to cut its steel capacity by 236 million tonnes.

Despite the May announcement, Australia’s iron ore has continued to rise in price for the last two months, seemingly unaffected by the trade war.

However, earlier this month, China’s biggest steel mill, Baowu, decided to crack down on its steel production and it’s sent the price toppling around the globe.

Peter Cai, director of the Lowy Institute’s Australia-China Relations Project, told news.com.au that China had managed to “kill two birds with one stone” through the price plummet.

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A BHP Billiton iron ore mine in Australia.

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“Iron ore is really having a large economic impact on China’s manufacturing industry,” Mr Cai said.

He said the CCP’s number one goal would be to drive down prices to help the Chinese economy.

And if that affected Australia – which has been in China’s crosshairs ever since calling for an investigation into the origins of the coronavirus – it was a bonus.

“If they can accomplish both goals at the same time they would be much happier,” he said.

For an idea of how the price drops are helping the Chinese economy, Mr Cai had a stark statistic.

“Chinese steel is a trillion dollar-plus industry,” he said. “Every $10 increase in iron ore price translates into $10 billion-more costs for the Chinese steel industry.”

He said Chinese officials were “frustrated”, leading to the radical decision to drive down the price in a concerted effort.

The already very low prices have taken another turn after China amped up the aggression towards Australia.

Iron imports by volume fell to 88.51 million tonnes in July compared with 89.41 million the previous month, according to China’s trade data.

This was a drop of 21 per cent compared to the previous year where imports of iron ore hit a record high of 112.6 million, data from MySteel revealed.

However, Mr Cai remains optimistic.

“As powerful as the Chinese government is, it’s fighting against the global commodity market,” he said.

He also pointed out that their current desire to bring down the price was “nothing new”.

In 2008, right after the global financial crisis, China tried with little success to bring down the price of iron ore after it spiked to an all-time high.

Mr Cai thinks this time will be no different.

Their actions “might have a temporary price”.

“Over the longer term, it’s essentially a supply and demand situation,” he said.

“Unless the Chinese steel industry slows down significantly, then the basic law of supply and demand dictates the price.”

Mr Cai said the biggest threat wasn’t China trying to cut down its purchases, but rather if they converted to scrap metal to make steel.

This would mean they wouldn’t need iron ore.

“If China does this, that will have an impact,” he said.

China produces more than 1 billion tonnes of steel a year, more than half of the global total, sitting at around 55 per cent.

Originally published as Iron ore feels China squeeze as prices plummet