China reveals plan to end the need for Australian iron ore

It’s released a comprehensive plan to seriously wean itself off Australia’s big export moneymaker, which could wipe billions from the economy.

China has announced plans to screw with Australia’s billion dollar moneymaker by cutting off its reliance on iron ore that comes from Down Under.

The Chinese government’s frustration with volatile iron ore prices and its dependence on importing the steel making ingredient has been laid bare in an article outlining its five year plan for the commodity.

Published in the state-backed Economic Daily, the article highlights moves to ramp up domestic production of iron ore by 30 per cent, alongside throwing money at overseas mines to increase China’s ownership in operations as well as pumping up recycling of steel scraps.

It has set an ambitious plan for 45 per cent iron ore “self-sufficiency” by 2025 showing its determination to wean itself off Australia’s iron ore which has sparked frosty diplomatic relations and a nasty trade war.

It gave special mention to Australia and Brazil for dominating China’s imports of iron ore, reported theAustralian Financial Review, with the country bringing in 1.17 billion tonnes of commodity in 2020, including 712.4 million tonnes from Australia alone.

Iron ore exports made Australia a whopping $149 billion in the last financial year.

“The control of overseas iron ore resources is obviously insufficient, and more than 80 per cent of the import volume comes from Australia and Brazil,” said Chen Ziqi in the article, a senior executive at China International Engineering Consulting Corp, a major adviser to the Chinese government on investment and construction.

“The risks to resource security are prominent.”

Mt Whaleback iron ore mine in Australia. Picture: Supplied

Mr Chen revealed an ambitious target to boost imported iron ore from mines with a majority Chinese equity stakes – up from 8 per cent currently to more than 20 per cent by 2025.

He also outlined plans to increase domestic iron ore by almost a third, up to 370 million tonnes, by accelerating output from 25 existing mines and developing 28 nationally planned mining areas.

Commonwealth Bank’s mining and energy economist Vivek Dhar said China’s goal would be possible but challenging, particularly as its domestic iron ore is more costly, which has seen production actually fall.

“The decline in China’s iron ore output is largely because China’s iron ore grades are much lower than what is found in Australia and Brazil,” he told news.com.au.

“By expanding domestic output, China will also increase its carbon emissions. China will therefore have to pay a higher price and commit to higher emissions for more domestic supply and security.”

He added it would be particularly challenging for China to cut its reliance on imported iron ore, especially in the short to medium term.

“The best pathway to reduce iron ore import dependence in investing in overseas iron ore projects.” he said.

“The likely pathway to reduce import dependence will be investment in overseas iron ore deposits in Africa. Gabon and Madagascar are options, but Guinea’s Simandou is the closest to realisation.”

BHP began production at its $US3.6bn ($A4.98bn) South Flank iron ore mine, 56km northwest of Newman in Western Australia’s Pilbara region, in late May. Picture: Rebecca Le May

While the Simandou mine in the West African country of Guinea is China’s greatest hope for reducing its reliance on Australian iron ore, it comes with many hazards, not least the current variant of concern Omicron which would prevent workers from getting into the country.

Mr Dhar added the project is at least five years away and initially is likely to produce 60 to 80 million tonnes annually, which is just 4 per cent of the market.

“The project could potentially produce 150 million tonnes per annum, 10 per cent of the seaborne market, but this is likely a decade away at best. Strategic reasons trump economic rationale for China’s interests to build Simandou,” he explained.

“First and foremost, Simandou is likely to be a substitute for declining high grade concentrate in China. Secondly, the unreliability of high grade Brazilian supply is another consideration. “Thirdly, the shift to decarbonise China’s steel sector will ultimately require higher grade ores, supporting Simandou’s development.

“And lastly, it will aide China’s diversification away from Australia, a reason that has gained more traction as Sino-Australian tensions remain elevated.”

Mr Chen admitted there were risks to investing overseas in countries such as Russia, Myanmar, Kazakhstan and Mongolia., as high-quality iron ore resources have already been carved up by developed countries.

“Only low exploration levels, poor resource conditions, large investment scales, long return periods, and backward infrastructure are left to Chinese enterprises. Risky projects,” he said.

The article also unveiled its plans to increase recycling of steel caps to create 340 million tonnes in 2025 up from 230 million tonnes in 2020.

Increased scrap steel usage will naturally reduce China’s iron ore demand and imports, noted Mr Dhar, which is also a part of its decarbonisation plan.

He said China’s Blast Furnace-Basic Oxygen Furnace (BF-BOF) steelmaking operations currently have a scrap steel usage rate of 15-20 per cent that could technically be lifted to 30-35 per cent.

“Increasing China’s Electric-Arc Furnace (EAFs), which rely more heavily on scrap steel and high-grade iron ore products, is the next major shift needed to decarbonise the steel sector,” Mr Dhar explained.

“The shift to EAF capacity will be challenging in the medium term, especially given the tightness expected in China’s domestic scrap steel market, power shortage risks and the carbon-intensive nature of China’s electricity grid.

“Coal power accounted for 68 per cent of China’s total power generation in 2020.”

Steel coils at an MA Steel warehouse in China’s Anhui Province. Picture: Ruan Xuefeng/VCG/Getty Images

But the economics of using the blast furnaces will likely remain more attractive than electric in coming years, reducing the incentive to boost its capacity, he added.

“It’s for this reason that a meaningful shift to scrap steel will first need China’s electricity grid to decarbonise more rapidly,” he noted.

One investor told the Australian Financial Review that if relations between Australia and China were still friendly, there would be no need for the plans, but in a chilling warning said “nothing unifies the Chinese more than a common enemy”.

Australia may have little to worry about now, but the threat is still looming, according to Mr Dhar.

“The threat is most pronounced in the long-term and with the investment in overseas projects. Simandou is the key project to watch,” he added.