China’s ‘frustrating reality’ cruelly exposed as iron ore prices rise

The Chinese government has been left red-faced as its plan to hurt Australia imploded this week, leaving our local iron ore producers in the driver’s seat.

In its race to become the most powerful nation on earth, China has flexed its muscles over the past few weeks with moves that have sent shivers down the backbone of Australia’s economy.

Like almost every nation on earth, the growing superpower saw its economy knocked back by the Covid pandemic and its government decided it would spend big to get out of the slump.

The Chinese Communist Party ensured there was a huge expansion in the availability of credit and committed to a state-directed infrastructure cash splash that saw the demand for steel explode.

China’s economy has bounced back more quickly than other nations, so the plan appeared to be a raging success. However, there was just one small problem.

To make all that steel, they needed iron ore in bulk and they needed it fast.

At the same time, supply lines of ore from major exporters like India and Brazil were hit hard by a dam collapse and the lingering effects of the pandemic.

China is trying to drive down the cost of iron ore. Picture: Mark Schiefelbein/AFP

Awkwardly, this meant that China – despite making aggressive moves to block our barley, wine and coal exports in response to Scott Morrison’s call for a Covid origin investigation – had to turn to Australia.

You don’t have to be an economic genius to work out what happened when demand was pumped up to record levels while the supply became scarce.

The simple laws of supply and demand kicked in and the price of iron ore – which is Australia’s biggest export and currently brings in $136 billion a year into our economy – skyrocketed in value.

Beijing was not happy and last month said it would do everything in its power to drive the price back down.

For a couple of weeks, it looked as if the plan might be working and the price of iron ore dropped. However, this week the market has been flipped on its head.

In news that would have irritated the CCP to no end, the price of iron ore on Wednesday skyrocketed by a whopping 10.3 per cent to $US209.10 ($A270.17) a tonne, according to CommSec. That came after a 5.9 per cent rise on Tuesday.

This defied experts who predicted the price would not rise above $US200 ($A258) again.

Yesterday it rose again very slightly, and this morning it has gone up again.

Iron ore pushed higher in the last day, up by 0.8% or $1.75 to US$211.20 a tonne (CFR Tianjin port). #ironore#ausbiz

— CommSec (@CommSec) June 3, 2021

A few weeks ago, the CCP’s media mouthpiece was boasting of its strategy to drive down the price of iron ore and warning Australia it would face economic “pain” as a result. Today, there is no mention of iron ore on its outspoken Global Times website.

Michael Shoebridge, the Director of Defence, Strategy and National Security at the Australian Strategic Policy Institute, said the iron ore situation has exposed a “frustrating reality for Beijing”.

“The Chinese state clearly wants to reduce its dependence on Australian iron ore,” he told news.com.au. “But Chinese demand for iron ore for steel production to power domestic construction and its manufacturing export engine makes it very unlikely that the Chinese economy can operate without it.”

He said that, as part of Beijing’s plans to diversify, it was looking to exploit untapped deposits in Africa.

However, he said the sheer scale of Chinese demand is likely to ensure Australian exporters retain a sizeable share of the China market for some years, despite everything the CCP is doing.

“The reliability and scale of other producers has not been able to match Australian suppliers, and much of this is unlikely to change fast,” he said.

Australia sends 60 per cent of its iron ore to China.

For example, the sovereign risk – the potential that a nation’s government will default on its sovereign debt – in a number of African states China is looking at remains a big problem for Beijing.

Mr Shoebridge said the extraordinarily low cost structures, high technology mining techniques and high quality ore in Australia mean China will have no choice but to keep buying from us.

Even when the price of iron ore drops, which it inevitably will at some point, Mr Shoebridge said the cost structures of the Australian companies mean that they will still be profitable at much lower prices.

And, to pre-empt further attempts to disrupt the market from Beijing, he said Australian iron ore producers could begin to diversify away from China, which currently buys 60 per cent of their output.

One way they could do this, he says, is to shift to work with partners on emerging “clean steel” production technologies that are carbon neutral – an area that major governments around the world are investing in.

“BHP, Rio and Fortescue are very well placed to enter strategic business alliances with partners like Germany’s Thyssen Krupp – who are already developing and operating a clean steel production technique – and automakers like Daimler and Toyota to produce clean steel without coal,” he said.

A steel factory in Chengde, China’s northern Hebei province. Picture: AFP

“This would create new customers and new sources of revenue and profits for our mining giants that would benefit all Australians.”

With trade tensions at an all-time high and an apparent communication blackout between political leaders in Beijing and Canberra, it is clear that Australia will have little influence on whatever China does next.

Beijing can either suck up the high prices and continue its massive steelmaking spree at a higher cost or it can try once again to drive down the value of iron ore.

Either way, Mr Shoebridge says we should be preparing for the future.

“Let’s stop worrying about what the Chinese government might do on iron ore and take steps that ensure our future prosperity,” he said.