Ecstasy could turn to agony for iron ore giants

Australia’s three resources giants generated $55bn in profit from digging up and shipping off iron ore, mostly to China, which is why the corporate ecstasy could turn to agony.

Our three biggest minerals groups – BHP, Rio Tinto and Fortescue – have just announced gross profits adding to a thumping $US44bn ($68bn).

Of that, $US36bn ($55bn) – more than 80 per cent of their entire combined profit – came from digging up and shipping off, mostly to China, Pilbara iron ore. These numbers capture their individual corporate ecstasies and potential agonies.

Iron ore generated between 70 per cent (BHP) and 100 per cent (Fortescue) – for Rio, it was 84 per cent – of their individual profits. Iron ore was also extraordinarily profitable.

Across the three, 64c of every dollar of sales revenue fell to the gross profit (EBITDA) bottom line.

For BHP and RIO, “everything else” produced just $US8bn of gross profit, at a dramatically less succulent 23c in the sales revenue dollar.

That’s the corporate ecstasy. The potential agony should be obvious – it all hangs on the “China Miracle” not just continuing but continuing to expand.

The numbers also capture our national economic ecstasy and potential – maybe, even inevitable agony.

For equally, the fortunes of Australia writ large, and indeed so also those of all 26 million of us individually, ride on the China Miracle.

The two big things about the China Miracle is just exactly what it has been built on; and what are the prospects for it to be sustained into the future and indeed the long-term future.

Broadly, briefly, as should be well understood, the China growth model has been built on two streams – outwardly, becoming the producer, of especially consumer goods, to the world; inwardly, massive, globally unprecedented, spending on infrastructure, construction and housing.

Australia’s three resources giants generated $55bn in profit from digging up and shipping off iron ore, mostly to China.

With all of it, and especially the infrastructure and construction – fast-rail,
super-highways, dozens of Melbourne-sized cities – making and pouring a lot of concrete, making and using a lot of steel, and making and using a lot, and I mean a lot, of especially, coal-fired electricity.

About 90 per cent China’s massive steel production gets used domestically – again, mostly in all that concrete.

While over the 21st century so far (to 2021), per capita electricity use in China –according to the International Energy Agency – has leapt by 489 per cent. In 2021, China’s total electricity production was 8.6m GWh – 32 times Australia’s – and 63 per cent of that came from coal-fired power stations. Renewables? An IEA-headlined impressive 23 per cent.

However, somewhat less impressively – for the
simple-minded, like our minister for destroying our energy system – two-thirds of that renewables contribution came from (these, days, wicked) hydro; just 7.6 per cent from wind.

Further, of China’s total energy use – fully 86 per cent came from the three fossil fuels – coal, oil and gas.

The big point about iron ore, to even just keep selling over a billion tonnes each year into China, the trio need China to keep pumping a lot of CO2, from making concrete and from making steel.

Secondly, it would take just a minor slowing, at the margin, to send prices – and profits – plummeting. Roll that through coal and gas as well, and we would arrive at Australia’s Agony, with a capital-A.