Iron ore proves its worth with changing China fortunes

China Matters financial supporters include the federal government (which has announced plans to cut back some of its funding for the organisation), Rio Tinto, Australia Post, PwC, Aurizon, Star Entertainment and the Australian National University. Picture: AFP

Rio Tinto’s profit results released on Wednesday are another reminder of the importance of the iron ore industry to Australia.

The company announced its second-biggest half-yearly dividend in history of $US1.55 on the back of persistently strong iron ore prices in the first half of the year, which helped to offset the $US1bn ($1.4bn) in write-offs from its non-iron ore operations.

Its interim net profit of $US3.3bn came as strong iron ore prices boosted underlying earnings from its iron ore division to $US7.7bn, slightly ahead of last year’s $US7.5bn result.

The results from the iron ore division come as its aluminium smelters and refineries in Australia and New Zealand lost more than $200m, with questions now being asked about the future of its smelters in NSW, Tasmania and Queensland.

Behind the results are the stronger-than-expected demand for steel — and thus iron ore — by Australia’s largest trading partner, China, which has also helped to underwrite the strength of the federal budget position as outlined last week by Josh Frydenberg.

While the rest of the world is reporting weak economic growth as a result of the pandemic, China’s economy appears to be recovering stronger than expected, with the world’s second-largest economy becoming a net importer of steel for the first time in more than 11 years this year.

In a commentary released this week, commodities analyst S&P Global notes that the last time this happened was in 2009, during the global financial crisis.

It says this is a sign of the “divergent fate of China versus the rest of the world during COVID”.

“China’s industry recovered much quicker than the rest of the world from COVID,” which it says has been “partly driven by China’s stimulus plans”.

“What is playing out in steel is expressing the broader reality that the Chinese economy seems in much better shape than others at this moment,” S&P Global says.

But just as China is again helping to stimulate or underpin sectors of the Australian economy (playing a critical role as it did in cushioning the impact of the GFC on Australia), relations with China are getting worse.

Australia is not alone in this, as ties with China by a host of other countries including the US, Britain and Canada are also under heavy strain.

But at the same time, as a report released on Wednesday by think tank China Matters says, the leaders of some of the key companies in Australia doing business with China or seeking to do more business with China are now wary of speaking out publicly on their concerns about the relationship.

The report by Michael Clifton, the former head of Austrade in China, expresses views that have been put to me personally by business leaders with a strong interest in Australia’s ties with China.

Clifton warns that many in business in Australia are now too afraid to speak out frankly about their concerns about the state of relations with China, the need to take China seriously as both a major trading partner and a major player in the Asia-Pacific, and the need for Australia to carve out its own ties with China at the same time as maintaining a strong security relationship with the US.

China Matters financial supporters include the federal government (which has announced plans to cut back some of its funding for the organisation), Rio Tinto, Australia Post, PwC, Aurizon, Star Entertainment and the Australian National University.

Clifton describes the current state of relations with China, and the debate in Australia about China as being “toxic”, warning that business leaders are now afraid of being “slapped down” if they try to express their views about the state of ties with China and their character and their loyalty to Australia being impugned.

As Clifton points out, discussion over China should not ignore serious issues such as China’s policy in Hong Kong, its treatment of Uighers in Xinjiang and its actions in the South China Sea, its clashes with India and China’s “Wolf Warrior” diplomacy under the leadership of President Xi Jinping.

Making it challenging

China, he says, is “making it challenging for even the most moderate of Australian voices to call for sensible engagement with the PRC”.

But as he says, work needs to be done to maintain direct channels of communication — through annual meetings of Chinese and Australian business leaders — and back channels of communication between Australia and China.

Much is made in the security debate over the need to keep open trade routes in the South China Sea. But on a pre-COVID basis China was not only Australia’s largest trading partner, it was the largest trading partner by 2½ times the size of the next trading partner in Japan. So if China did want to harm Australia’s trade interests, it can do it legally and swiftly by cutting off its trade ties without any naval interaction at all.

Clifton is proposing the establishment of a national advisory committee on China to provide direct advice to the prime minister.

He argues that more needs to be done to have a business voice on China than the current Business Council committee on China, currently headed by former federal minister Warwick Smith, and the Australian China Business Council, which he argues is more representative of small and medium-sized Australian companies doing business with China.

Significantly, while the Morrison government has been accused of being played by the Trump administration winding up Canberra to speak out against China as part of the Trump re-election campaign, Foreign Minister Marise Payne was also at pains in her visit to Washington this week to spell out that Australia would make up its own mind in the way it dealt with China.

It led to speculation that while the Trump administration is talking about regime change in China, the rest of the world including Australia, cannot ignore the potential for a possible regime change in Washington.