Tensions between China, Australia explode over iron ore
Australia and China are edging closer than ever to an explosive trade war as a heated minerals dispute breaks out between the two nations.
Iron ore prices. Critical minerals investment.
Is this economic combination a recipe for a renewed China-Australia trade war?
Beijing has more steel than it needs. But the world wants more.
So high iron ore prices appear entrenched. For now.
Australia has a wealth of rare earths and critical minerals. But China monopolises the market.
Successive bans by Beijing on these minerals and related technologies have sent shockwaves through a dependent global economy. So the demand for Canberra to extract and sell the elements - with no strings attached - is urgent.
Beijing’s not pleased with either scenario.
And both have put Canberra high in its coercive diplomatic sights.
But Washington DC’s not pleased with Canberra’s continued economic engagement with China. And its excessively transactional President doesn’t tolerate dissent.
So Australian businesses may soon find themselves at the heart of a new era of global embargoes, tariffs, and espionage wars.
“To say that Australia is not well positioned for this world is an understatement,” Australian Institute of International Affairs (AIIA) President Dr Heather Smith told the institute’s annual address.
“It’s lonelier and more fraught for us – as demonstrated by both our key strategic partner and our key economic partner having engaged in economic coercion against us.”
Heart of iron
China’s steel demand peaked in 2020 at about 1 trillion tonnes. It fell to just over 850 million tonnes in 2024. And further falls are on the cards.
But iron ore export prices remain stubbornly - and unexpectedly - high.
In part, that’s because of increased demand for higher-quality ores. It’s also because other nations - including India - want the raw material for their own steel mills.
But China remains the producer of more than half the world’s steel supply. And expanding export sales won’t cover the deficit.
“Eventually the combination of weaker demand and lower prices should force producers to curtail output, though this will probably be a slow process given the state’s reluctance to jeopardise employment,” argues Paul Fraioli for the International Institute for Strategic Studies (IISS).
The Chinese Communist Party is annoyed at the situation.
Why pay premium prices when its domestic economy faces a glut?
“Five companies – Australia’s BHP, Fortescue, Hancock Prospecting and Rio Tinto, and Brazil’s Vale – account for 75–80 per cent of annual exports, with China taking around 75 per cent of global imports,” writes Fraioli.
Beijing accuses these five companies of price-fixing.
So it created the China Mineral Resources Group, a cartel-like operation centralising the purchase of iron ore for Chinese manufacturers, “in an effort by China to take more control over prices”.
Fraioli says unconfirmed reports suggest Beijing banned low-grade iron-ore shipments from BHP’s Jingbao mine in September after failing to win a price cut. A similar ban against the Jimbelbar mine was issued earlier this year.
Beijing is also insisting that transactions shift to the Chinese renminbi (yuan) away from the US dollar.
“With new sources of supply coming online, it appears that China feels it is in a stronger position to exert influence in the market,” he argues.
Specifically, this is the Simandou iron-ore project in Guinea. It’s expected to come online in 2026. China is a major stakeholder, alongside Rio Tinto.
Oversupply and the availability of a new, high-quality mine will put Australia’s industry on its back foot.
And the $107 billion export that is Canberra’s single-most significant source of income will inevitably shrink.
“Consolidation in the iron-ore sector is expected as a result, with the closure of some higher-cost capacity,” Fraioli concludes. “Australia’s ore grades are starting to decline, which will make the country’s iron ore less competitive, and it will command a lower price.”
Critical short circuit
Rare earth elements and critical minerals are central to the modern high-tech economy. They enable the tiny yet powerful components that are central to everything from mobile phones to radars, electrical generators, and rechargeable batteries.
The wake-up call came when Beijing imposed draconian conditions on the use, re-export and military application of key rare earths in October,
“Its aim was to reveal such leverage that other nations would accept that compliance, not competition, with China was the only viable approach,” ASPI’s Cyber, Technology and Security Program team argue.
It’s a $3.7 billion global industry. And it’s expected to more than double by 2032.
Canberra wants its share.
“Australia brings to the table what Washington needs: resource abundance, political stability and a proven record as a secure supplier,” argues Australian Strategic Policy Institute (ASPI) analyst Alice Wai.
“Yet Washington’s protectionist tilt risks eroding trust”.
President Donald Trump rejected a proposal for guaranteed US access to Australian minerals in return for relief on steel and aluminium tariffs. The new Washington-Canberra minerals framework, while promising, is vague on specifics.
“Canberra has signalled it will not wait indefinitely,” adds Wai.
The heart of the problem is that the volumes and values involved are nothing like those of iron ore.
“When the market is tiny, it simply cannot deliver economic growth in the way the government is promising,” explain Australian National University international relations analysts Dr Darren Lim and Eli Hanes. “Add to that China’s position as the global demand centre. If Australian projects are approved on the condition they do not sell into China, it means walking away from the largest pool of willing customers, which immediately complicates corporate finance and market competitiveness.”
Global demand is soaring. But returns do not yet promise sufficient returns for corporate investors.
Beijing’s market dominance was only made possible through Communist Party investment and control.
And it’s a strategy being mirrored by the Trump Administration. The Pentagon will pay US-owned MP Materials a guaranteed price far above market value to isolate it from Chinese market manipulation. But that’s even more bad news for Australian producers, such as Lynas Rare Earths.
Thus, Canberra’s push for a price floor for its proposed role in building an alternative to Beijing’s weaponised supply chain.
“The move suggests a more assertive industrial strategy designed to keep value onshore and diversify partnerships if Washington remains narrowly focused,” Wai states.
“Extending such mechanisms to allies would not only strengthen trust but also deliver the scale of supply diversification that Washington’s strategy requires.”
Winning free-market competition
Canberra may open new rare-earth and critical minerals projects.
Washington DC and other Western allies may offer a viable price.
But that leads to another Beijing-dominated chokepoint: Production.
“The very partnership designed to reduce China’s coercive leverage is increasingly relying on Chinese technology to give effect to its objectives,” ASPI argues.
“This issue extends across the minerals industry, not just rare earths. The challenge is ensuring the operational technologies that enable extraction, refining, and manufacturing are sufficiently diversified and secured.”
Processing rare earths has been unpopular for decades because it is energy-intensive (and therefore expensive) and highly polluting.
The Chinese Communist Party didn’t have to worry about public opposition, environmental damage or cost blowouts. So it pushed ahead with optimising the technology and processes anyway.
“As an exercise in state strategy, China has manoeuvred into a powerful position in supply of critical minerals,” ASPI argues.
In a competitive global market, heavily subsidised Chinese products are inevitably attractive.
“But this means we need at least to see through the illusion of how short-term savings are blinding us while we embed long-term strategic dependencies—those that will be far costlier to unwind,” ASPI adds.
AIIA President Dr Smith agrees.
“Tor too long we have underinvested in the foundational elements of our nation that are required to better position us for a new world – whether it be sovereign science and technology capability, a diplomatic footprint that reflects our global interests, defence spending that reflects our strategic circumstances, an industry policy that enables future growth rather than protecting the past…”
Fortescue’s plan to decarbonise its Pilbara mining operations relies heavily on Chinese backing.
It has a $400 million deal to buy Chinese-built heavy machinery reliant on China’s Huawei 5G communication and control systems. It built a $150 million Chinese-designed automated electrolyser plant in Gladstone, Queensland. And it’s funding its operations with a new $3 billion loan from the Bank of China and the Industrial and Commercial Bank of China.
BHP has also signed an agreement to develop mining equipment with Chinese heavy-machinery maker (and military supplier) XCMG. It’s also working with electric carmaker BYD and battery maker CATL.
And it’s reportedly preparing to pay for up to 30 per cent of its iron-ore exports to China in China’s yuan instead of the US dollar.
“The scope and impact of dependency on Chinese technology in critical minerals—and indeed all minerals—should neither be ignored nor assumed,” ASPI warns.
Can’t buy me love
“The world Australia faces is increasingly undemocratic, grievance-driven, aggressively interventionist and multipolar,” AIIA President Dr Smith said during her annual address.
The United States appears to have abandoned its role as “global insurer”.
Instead, the 47th President is determined to extract maximum profits.
“The most impacted are allies, like Australia, who bought into the system and were freed up to spend less on securing their future,” Dr Smith argues.
Canberra is out on a limb.
And Beijing knows this.
“Beijing undoubtedly will seek to test what it has called our ‘two-faced’ policy as we juggle our economic and strategic interests,” she warns.
It’s long been an undercurrent in Beijing’s public commentary on Australia.
China was ready “to maintain strategic communication with Australia, expand mutually beneficial cooperation and keep working together to build a more mature, stable and productive China-Australia comprehensive strategic partnership,” Premier Li Quang said in October.
He alluded to recent attempts to restrain Beijing’s control over Australian mining assets by “voicing hope that Australia will provide an open, transparent and non-discriminatory environment for their investments and operations”.
Beijing has the money Australia needs. Beijing has the refined materials Australia needs.
Beijing has the technology Australia needs. Beijing has the market Australia needs.
Meanwhile, Washington is vacillating. So finding alternatives requires effort.
“We need to be hedging by planning for greater strategic autonomy, as distinct from strategic independence,” Dr Smith argues.
“Let me be clear, this does not mean turning away from the US. But it does mean inoculating ourselves by taking out a more comprehensive insurance policy than in the past.”
That means greater self-reliance, greater defence spending, and greater sovereign defence capability.
The AIIA president adds that it also means more hedging of interests through new coalitions and partnerships.
“My point here is that we will have to move beyond rhetoric into action, and much faster than our political and bureaucratic decision making currently allows,” Dr Smith concludes.
“Our lack of progress on our munitions and liquid fuel stocks is a case in point.”
Jamie Seidel is a freelance writer | @jamieseidel.bsky.social
