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China’s efforts over the past week to reduce the surge in the price of Australia’s largest export appear to have started to have some effect.

It’s still early days, but the price of iron ore fell a further five percent at the end of last week – after the Chinese government presented a plan to combat its continued price hike.

The drop is already hitting Australian mining companies on the ASX today. Rio Tinto was down 0.93% to $ 122.12, while BHP was down 1.1% to $ 47.75.

However, the price of iron ore – a crucial ingredient in steelmaking and an economic lifeline for Australia – is still high amid huge demand around the world.

This time last year it was worth around US $ 60 per tonne. At the end of last week, the same amount was worth over US $ 200.

As nations seek to recover from the pandemic by spending heavily on infrastructure, they need more steel.

China is clearly aware of this and has its own huge demand for steel. As a result, it has increased its steel production to record levels – giving Australia a much needed and surprising cash boon at a time when relations between Canberra and Beijing have been considerably strained.

However, China is looking to do something about it.

In its monthly briefing, the National Development and Reform Commission (NDRC) recommended that Chinese companies boost domestic exploration for steel inputs, explore overseas ore resources, and expand their sources of imports.

RELATED: China’s Empty Threat to Hurt Australia

The flaws in the Chinese plan

Analysts pointed to the flaws in the plan, saying China would need 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 shows 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 could turn out to be the peak, Australian miners saw continued strong activity in May.

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 expected to account for around 15% of the country’s total emissions.

This is clearly not going as planned, with steel production reaching record levels, but the Chinese government is expected to try to curb booming steel production in the second half of this year.

Given that Australia sells over 60 percent of its iron ore to China alone, this could mean that we are in a severe economic crisis.

Australian mining insiders told theAFR they are wary of what could happen in the near future if China intervenes harshly in the steel market.

Global demand fuels optimism in industry

However, they said that the level of demand in the rest of the world is so high that they do not see the need to panic.

“If China cuts steel production, someone else will,” a source inside one of Australia’s large miners told the publication.

This optimism is fueled by the fact that the world’s steel market is on fire right now.

European steel giant ArcelorMittal this month raised steel prices for the 12th time since November, bringing a ton of hot-rolled coils (steel) in Europe to € 1,050 (A $ 1,655) – in increase of over 80% in the last seven months.

RELATED: China to step up iron ore mining at home

Meanwhile, Nucor, America’s largest steelmaker, is storming the stock market and struggling to find workers to keep up with its expanding business.

Even COVID-19-ravaged India is struggling to increase its steel exports, which rose about 26% in the March quarter, according to S&P Global Platts.

However, Shiro Armstrong, director of the Australia-Japan Research Center at Australian National University, told news.com.au that if China and Australia tried to diversify, it would have serious consequences for both countries. .

He said the idea that Australian mines can just find other nations to compensate for our iron trade with China “sounds fancy.”

“It would be unrealistic in the short term, and probably in the medium and long term for both countries, as it would have a cost that neither governments nor mining companies can bear,” he said.

Government intervention ‘could lead to more uncertainty’

He said the international market between Australia and China is the one that delivered.

“There is no good track record when governments try to intervene in the market, and China’s efforts could lead to more uncertainty and higher prices there,” he said. declared. “None of their policies will work because they would cause a huge blow to the construction industry in China.”

On the other hand, for Australia, he said the demand for iron ore elsewhere in the world just isn’t there – especially with prices as high as they are now.

The latest figures show that China produces more than half of the world’s steel – producing more than 996 million metric tons in 2019. The second highest was India, which produced nine times less – with slightly more of 111 million metric tons.

Mr. Armstrong said it would be best if the governments of the two countries stayed out of the market.

“We have had a very beneficial relationship with China, driven by market fundamentals. If the two countries start to seek to withdraw from this open market… it is a path towards the standard of living in the two countries ”, he declared.

China’s dependence on Australian iron ore – which has resulted in huge financial gains for our largest mining companies – has arisen despite trade tensions between the two countries which have reached an all-time high.

RELATED: Australia Failed on ‘Assertive China’

The outright ban is ‘unimaginable’

According to Chinese state media, NDRC spokesman Jin Xiandong accused Australia of damaging trade relations.

“Therefore, we must make the legitimate and necessary reaction, and Australia should take full responsibility for these movements,” Jin told the conference.

“We urged the Australian side to treat Sino-Australian cooperation objectively and reasonably, to treat Chinese enterprises fairly, to end the disruption of bilateral trade and investment cooperation, and to take action. to promote bilateral relations for healthy development.

But despite Australia’s frigid relationship with China, an outright ban on iron ore is “almost unimaginable.”

Instead, Beijing could resort to other tactics to make exporting iron ore more difficult for Australian companies, energy research and consultancy firm Wood Mackenzie told Bloomberg earlier this month. .

“While an outright ban would be almost unimaginable, various forms of restrictions, delays or increased administrative burdens on Australian iron ore imports could still occur,” warned Wood Mackenzie.

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