Five reasons why China is destroying Aussie iron ore price

The ASX plunged as iron ore prices collapsed, but why is China allowing one of its previously valued Aussie resources to crash?

COMMENT

China has engineered the greatest iron ore crash of all time. I believe there are five reasons why.

First, China has embarked on a remarkable property sector reform program that is wiping out household names such as Evergrande, its formerly largest developer. There are more casualties to come.

It is doing this for the good of its economy in the future. Wasteful building and debt overhangs act like parasites sucking away economic dynamism and productivity.

If China does not fumigate these pests now then it risks falling into what is known among economists as the “middle-income trap” in which living standards stall before an economy becomes rich.

Anxious investors, employees and suppliers describe a scramble inside teetering Chinese property giant Evergrande. Picture: Noel Celis/AFP

Second, China is confronted with a dramatic change in its strategic outlook. Covid-19 and its growing but tyrannical power has turned much of the free world hostile to it.

This includes Australia, as well as a variety of other commodity suppliers. Thus China can no longer rely upon these supply chains and must diminish its dependence upon commodity imports from liberal nations, and in general.

China no longer wants to rely on the commodity iron ore – of which it sources a large percentage from Australia. Picture: Che Chorley

Third, China is confronting an untenable position in the politics of commodity prices. For the past year, markets have priced commodities for a new “supercycle” based on the notion that there will be a war on climate change and ongoing fiscal spending in Western nations to fight inequality and to fight China in a new Cold War.

But China is by far the largest consumer of commodities on the planet. So, in effect, via commodity markets, China is being asked to pay for a whole bunch of wars targeting itself.

Not all that surprisingly, it is saying “no thank you” by squashing its commodity demand and crashing prices.

Fourth and fifth, China is now embarked on a campaign to eliminate not just excess building but excess energy usage. This is spurred by both climate change and recent energy price blowoff prices. It has recently curtailed steel output, cement output, aluminium output and other industrial sectors because it is now intent of bursting runaway prices for coal, gas and oil.

There is no apparent end in sight for these various policy campaigns.

Except for much lower commodity prices across the board.

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review. MB Fund is underweight Australian iron ore miners.

Originally published as Five reasons why China is destroying Aussie iron ore price