China crisis: why it’s time to review of our dependence on iron ore exports
The brittle nature of east Asian security in the new era of Xi Jinping calls for a review of our dependence on iron ore exports.
Can anyone conceive of Australia’s iron ore sales to China, our big-ticket global income earner, lurching downward uncomfortably – or coming to a grinding stop altogether?
Yes. This unthinkable is quietly being thought, in corporate and government back rooms, in hypotheticals, and in risk-management exercises, even as relations with China are being stabilised by Canberra as a top priority, to widespread applause.
A core challenge remains – that while China’s leadership is strong, the personalisation of governance and its remorseless changes and ambitions make it a less stable trade partner.
Conflict over Taiwan is unlikely, but the odds are too close for any comfort. The rhetoric remains intense. And a worldwide pandemic followed by a ferocious land war in Europe have concentrated minds on the prospect that the worst does indeed sometimes happen.
Australia isn’t in the military front line of any likely hot war or blockade, though Australian military bases hosting US forces and joint intelligence facilities could be targets for China’s long-range strike capabilities in the event of conflict.
And even in scenarios short of full-scale war, Australia looms large in the economic sights of all sides, since its iron ore provides China with a strategically vital input, including for the vast steel quantities needed for its immense naval build-up.
China depends on Australia for about half of the ore it needs to make its steel, which accounts for more than half the world’s total production.
Ore sales to China – 60 per cent of all Australian exports to the country – earned Australia $108bn in the financial year 2021-22, more than 18 per cent of its total worldwide goods and services income, and delivered Western Australia’s government 25 per cent of its general revenues.
Yet double dreams of Chinese President Xi Jinping, the most powerful Chinese leader since Mao Zedong – and with massively more resources at his command – are triggering the concerns of some Australian decision makers that our crown jewel – our iron ore exports – could disturbingly soon come into play.
The first is Xi’s dream of a reconstructed economy that prioritises “common prosperity”, self-reliance and “socialism with Chinese characteristics” and elevates Communist Party and state security over growth. Demand for ore could start to slump as China’s once-voracious property and infrastructure sectors continue to tread water, as they are doing already – or sink, exacerbated by the impact of rapid demographic decline.
The second dream, more intensely worrying because it would force a rapid crisis over ore sales, is of an increasingly militarised Chinese rejuvenation – which has already successfully corralled the South China Sea – that goes on to involve “reunification” by seizing Taiwan.
Repercussions of plummeting ore receipts would be felt severely in the wider economy, and might include a significant fall in the value of the Australian dollar, pushing up substantially the price of imports and forcing cuts in federal and state government services.
If conflict over Taiwan were to be the trigger, that would also require searching elsewhere for new sources for many products that are now made In China.
David Uren, a Senior Fellow at the Australian Strategic Policy Institute, has written that “it would be the loss of access to Chinese manufactured goods” – including goods assembled elsewhere with key Chinese components – “that would be the greatest source of disruption for the Australian economy”, as shown by the impact of sanctions on Russia. And “the global impact of the loss of trade through the Taiwan Strait would be incomparably greater than that flowing from” the Ukraine war.
Xi said soon after taking power a decade ago: “The issue of political disagreements that exist between (Taiwan and China) must reach a final resolution, step by step, and these issues cannot be passed on from generation to generation.” That clock is still ticking.
He declared at last October’s Communist Party congress that “the wheels of history are rolling on towards China’s reunification” as “a historic mission and an unshakeable commitment” of the party, which “will definitely be fulfilled”.
Xi has usually in speeches stressed his preference for a peaceful “reunification”, but this appears to be a challenging – at best – prospect.
Polling shows that 86 per cent of Taiwan’s 24 million population reject China’s proposed “one country, two systems” formula – under which Hong Kong is already being ruled increasingly harshly by Beijing – while only 2.4 per cent of respondents identify themselves solely as “Chinese”, with 63.7 per cent calling themselves “Taiwanese”.
Australia’s Defence Strategic Review, delivered in April, said that “China’s military build-up is now the largest and most ambitious of any country since the end of the Second World War”. Its defence budget has risen by an average 9 per cent per year for 25 years.
In March 2021, Admiral Philip Davidson, the then-head of the US’s Indo-Pacific Command, claimed – though without publicly adducing convincing evidence – that China could take military action against Taiwan by 2027. That is the year when the People’s Liberation Army, which is the military arm of the Chinese Communist Party, celebrates its centenary.
Assessing China’s economic prospects, former prime minister and now ambassador to the US Kevin Rudd explained last year how “the shift to the left in China’s overall economic policy settings, combined with the crackdown on the property and tech sectors”, had created “significant economic headwinds for China’s growth numbers”. He described these headwinds as “manifold, complex and strong – and in large part self-inflicted due to a number of especially poor policy choices by China’s leadership”.
The influential Financial Times journalist Gideon Rachman wrote recently that “the contest for word of the year is already over. In the geopolitical category, the winner is ‘de-risking’.”
That means, he wrote, reducing dependencies on China and restricting technology exports, while still encouraging trade with the vast Chinese market.
“It is a more or less coherent policy,” he says, “as long as the risk that is being hedged against is political coercion. But it begins to fall apart if the risk is an actual war between the US and China, perhaps over Taiwan. Unnervingly, some US officials now put the chance of a military conflict at 50 per cent or more. If that happens, then Western companies will come under immediate pressure to pull out of China.”
Benjamin Herscovitch, Research Fellow at the Australian National University, says this is “a conversation Australia should be having now”.
“The thinking in Washington on how to punish China economically in Taiwan invasion scenarios and contingencies short of war is building a head of steam,” he says.
“Especially in worst-case war scenarios, Washington would probably make big asks of Canberra, including possible export bans of raw materials like lithium and iron ore. The especially ticklish issue for the Albanese government is that for the prospect of such economic punishments to have a real deterrent effect on China, they’ll need to be signalled in advance.”
Herscovitch, the author of the Beijing-to-Canberra-and-Back blog, says: “With the Albanese government seeking to repair relations with Beijing, the thought of delivering those kind of threats now is painfully daunting. But given intensifying cross-Strait security dynamics and the dire direction of political travel in Beijing and Washington, there’s a growing chance that Canberra won’t be able to avoid being part of such US-led efforts to squeeze China economically.”
It would be likely that corporations perceived to continue trading in defiance of sanctions would risk losing access to global US dollar financial markets, for starters – massively challenging, given that this remains the world’s reserve currency. This all threatens to present a devilish dilemma because iron ore has been central to Australia-China relations for the past 50 years, since sales began, and have been accompanied by massive Chinese investments in Western Australian ore mines to help guarantee supply.
The miners have achieved constant increases in efficiency and productivity as they have also discovered increased reserves.
But as the late Saudi Arabian oil minister Sheikh Ahmed Yamani once said, warning about the future of oil: “The Stone Age came to an end not for a lack of stones.”
Richard McGregor, Senior Fellow for East Asia at the Lowy Institute, has written that “the iron ore sector’s resilience so far is due to strong Chinese demand and limited alternative supplies.
But Beijing has set clear targets to wean itself off its overdependence on Australian iron ore by diversifying supplies, changing the way it makes steel, and leveraging its position as the world’s largest importer in order to bring down prices.”
He notes how former federal treasurer Joe Hockey recounted that then-US president Barack Obama asked Tony Abbott, when Abbott was prime minister, to halt ore sales to China – of course unsuccessfully.
Ore exports to China are dominated by the Big Three – Rio Tinto selling about 29 per cent, BHP 27 per cent and Andrew Forrest’s Fortescue Metals Group 26 per cent, with Japanese conglomerate Mitsui next with 6 per cent. Including mainly iron ore but also other sales, Rio generates about 57 per cent of its total revenues from China, BHP about 60 per cent and FMG 90 per cent.
Australia – especially BHP – has been here before. The country was a leading producer of minerals including lead, zinc and copper, with the Broken Hill mine prominent, before World War I. But its top customer was a German cartel that also dominated global processing.
Pressed by the Australian government as it entered the war, Britain agreed a long-term contract to take over as the chief buyer of key strategic metals, and processing developed rapidly within Australia. Is there any prospect today of the US, for instance, stepping in to buy massive amounts of Australian ore in the case of conflict with China?
After the shocking Nanjing massacre in 1937 – following the Japanese invasion of China – the Joe Lyons government embargoed iron ore exports to Japan, but left open on a technicality the sale of processed ore. Thus a shipment of pig-iron sailed to Japan from Port Kembla in NSW, after trade union protests, following authorisation from then-attorney general Robert Menzies.
But meanwhile, Essington Lewis, the BHP managing director from 1926-50, had begun investing in war-relevant industrial capacity following a mid-1930s study tour to Germany and Japan, and was consequently appointed director-general of the Munitions Department during World War II.
Discussion around Australian industrial resilience is now focusing on whether, or how, the country’s still-embryonic reserves – yet to be fully explored – of critical minerals, crucial for the transformation to renewable energy, transport and other sectors, has the potential to soar, driving the country’s “green economy” credentials.
Could critical minerals – especially vital for batteries and magnets for the new green economy, as well as for contemporary military hardware – ride to the rescue, succeeding iron ore as Australia’s big-ticket export?
Possibly, but not any time soon. For – unlike iron ore and steelmaking – it is in the processing of critical minerals that most income is to be earned. This is dominated in 2023 by China, which has built up the crucial expertise, and it would require massive investment and unprecedented government intervention to establish a competitive, rival industry.
This would also need full state government co-operation, not least in easing and speeding regulatory processes, which are continuing to hold up many such projects around Australia.
In the case of lithium, for instance, Australia was last year responsible for 53 per cent of global production – but 96 per cent was exported to China. What would happen to this trade in the event of a spiral into east Asian conflict?
An industry insider says: “Australia has very limited technical capability for critical minerals processing at the moment. And it is not a single set of capabilities; different technologies are involved in processing each critical mineral, and for each step in the multistage process.
“The industrial uplift for Australia to acquire even a subset of the most critical of these will be immense.”
China also tends to intervene to flood the market whenever a new entrant comes in, causing the price to fall, and as supplier of more than 60 per cent of the world’s natural graphite, is currently withholding from Sweden sales of graphite, which is crucial for lithium-ion cells for its competing battery industry.
Kim Beazley, who has now returned, since completing his term as Western Australia’s governor, to his former key professional expertise as a leading strategic analyst, and colleague Ben Halton have just produced an important 43-page report for ASPI on “AUKUS and critical minerals: Hedging Beijing’s pervasive, clever and co-ordinated statecraft.” In it, they write that the world is entering “a new age of innumerable supply-chain risks, including via an escalation of military posturing in Europe and around the South China Sea.”
The AUKUS grouping – Australia-UK-US – “must form the supreme central command of allied effort to diversify critical-minerals supply beyond China’s globe-spanning control and influence. Tangible, ongoing and suitably funded action is needed,” including co-funding projects for supply assurance and the production of metals and alloys as inputs to vital components.
The road will be long, they warn, stressing the challenges from “a lack of mineral processing, its associated industrial and scientific complexity, sizeable lead times, and the necessarily large investments that too often exacerbate strategic risk”. In rare earths, “a project typically needs at least 10 years and more than $1bn to get up and running.” So far, government offers of support have fallen well short of this, and super funds and other potential sources have yet to declare convincingly their backing.
And “any credible case suggesting that AUKUS or its partners can realise security of supply without a vast new mega-infrastructure in Australia is simply inconceivable … It’s time to allay immediate strategic risk,” since at present “most output is dug up and then sold to China for processing”.
They conclude that “market forces alone aren’t going to fix this problem … Sovereign resilience is beyond the reach of any one country. It’s time to secure the liberal-democratic order for the next 75 years.”
In the meantime, Australia’s iron ore sales to China – which Beijing scrupulously quarantined from its commercial coercion measures in 2020-21 – will continue at full pelt. For now.
But one of Australia’s leading China experts, John Fitzgerald, warned after Russia invaded Ukraine that if Xi resorts to coercion or military force to compel Taiwan to join the People’s Republic of China, then “however Australia responds, the risks for businesses are potentially catastrophic”.
He wrote that any Australian business dependent on China for supplies or technical inputs or for markets or investments would be likely to face customer boycotts, if not international sanctions, that would compel it to exit the market and compete with others in a scramble for alternatives.
“By then it will be too late. If Ukraine teaches Australia anything, it’s that businesses and others with a high level of exposure to China should be planning for the worst while hoping for the best.”
Other countries would in time crank up their steel making and also, perhaps, demand if China were to take itself out of global markets by its actions. But such a process would take some years.
Frustratingly for Australian governments, for mining companies, and for millions of shareholders including via everyone’s super schemes, the brittle nature of east Asian security in the new era of Xi Jinping requires the unthinkable to be thought through, deterred if possible, and guarded against if not.
Rowan Callick is an industry fellow at Griffith University’s Asia Institute.
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