China’s plan to lower the cost of Australia’s largest export – which currently brings in $ 136 billion a year to our economy – is not going to happen, at least in the short term.
The price of iron ore soared 10.3 percent on Wednesday to US $ 209.10 a tonne, according to CommSec. This comes after a 5.9% increase on Tuesday.
This morning the price continued to climb. It rose 0.2 percent or $ 0.35 to US $ 209.45 per tonne.
While this is great news for Australian mining companies, it will be the last thing Beijing wants to hear after recently reaffirming its intention to quell soaring iron ore prices.
Last month, its National Development and Reform Commission (NDRC), along with four other departments, pledged to severely punish “excessive speculation, price hikes and other violations” which they say helped make raise prices.
This was followed by an 11% drop in the price of iron ore – a valuable raw material that China needs to make steel – with some analysts predicting a downward trend.
There have been frightening warnings from economists and Chinese government spokespersons since the price drop.
NAB’s head of commodities research, Lachlan Shaw, suggested that “iron ore could no longer trade above US $ 200.”
However, Beijing’s plan has encountered a major glitch over the past two days, with the price of iron ore now comfortably above US $ 200.
The Chinese plan is not working
In a note this morning, the Bank of America suggested that China’s plan may simply not work.
“As long as global demand remains strong (including in China) and markets are tight, we believe that the Chinese authorities are unlikely to be able to lower prices on a lasting basis,” he said. he declares.
He predicts that iron ore will average US $ 172.2 per tonne this year; then US $ 143.8 per tonne in 2022; it is growing slowly until 2025, when it will end below the $ 100 mark.
Chinese government spokespersonWorld timeswarned of “Australia’s pain” if iron ore prices fall.
“While China’s dependence on Australian iron ore will likely continue for the foreseeable future, despite its efforts to diversify its sources, sharp declines in iron ore prices would result in heavy losses in revenue for export to Australia, which is already experiencing a decline in trade with China in areas such as wine and seafood, ”a reporter wrote in an op-ed for the newspaper.
MB Fund and MB Super Chief Strategist David Llewellyn-Smith warned that it was only a matter of time before China cut Australia’s iron ore, and that there would be big consequences if it did. was happening.
“Nominal growth will be crushed; Inflation and wages will be affected for years; The budget will be a sea of red; Mining stocks will drop; Bond yields will plunge; The AUD is going to collapse, ”he said in his MacroBusiness post this week.
On top of that, Australian house prices would ‘fall’, ‘devalue drastically against the world via the currency collapse’.
Why does China need our ore?
Australia’s secret to maintaining a sense of economic normalcy throughout the pandemic recession has been iron ore.
The value of the vital steelmaking ingredient has skyrocketed over the past year to an all-time high, and China, which produces far more steel than anyone in the world, cannot stop buying it.
This means that everything we’ve heard about what China has done to our exports over the past year, like blocking our barley and wine, has been pretty much unnecessary from Beijing’s point of view.
While it is difficult for producers in these sectors, the benefits of higher iron ore prices far outweigh the damage to the Australian economy by attacking other exports.
The bonanza of soaring prices was heavily reflected in the Morrison government’s latest major spending budget and has undoubtedly given Australia a major economic boost in these pressing times.
Ironically, it is mainly, but not exclusively, China’s fault that iron ore prices are so high.
Shiro Armstrong, director of the Australia-Japan Research Center at Australian National University, told news.com.au that it was China’s relentless demand for iron ore that had pushed its price up.
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In an effort to quickly recover from the pandemic, China responded with a huge expansion in credit availability and a splash of state-led infrastructure funds that saw demand for steel explode.
The plan was successful and helped China out of its economic downturn faster than other major economies.
However, there are supply issues from other major iron ore producers like India and Brazil – both of which have been crippled by the pandemic – meaning China could only find ore from the quality and quantity it needed in Australia.
Flaws in the Chinese plan
The price of iron ore plummets as Beijing implores its steelmakers to explore overseas ore resources and expand their sources of imports.
However, analysts pointed to flaws in the plan, saying China would have to develop hundreds of new mines in a short period of time to keep up with its steel production.
China has been the main driver of global metals markets for over a decade and they show no signs of slowing down.
The research house Capital Economics estimates that Chinese steel production rose 7.5% in April compared to March. While Capital Economics believes April’s production level may turn out to be the peak, Australian miners saw strong activity continue through May.
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However, China is under pressure to reduce its carbon footprint and has vowed to take steps to do so, which is at odds with its recent surge in steel production.
Beijing started the year with a plan to cut steel production in 2021 to reduce pollution in the sector, which is estimated at around 15% of the country’s total emissions.
Clearly this will not go as planned, with steel production reaching record levels, but the Chinese government is expected to try to curb the surge in steel production in the second half of this year.
Since Australia sells over 60% of its iron ore to China alone, that could mean we will take a serious economic hit.
Australian mining insiders told the AFR they are wary of what might happen in the near future if China insists on intervening in the steel market.