China has revealed plans to diversify its iron ore supply – and now experts warn that “not if, but when” they are pulling the pin in Australia’s most important source of exports, prices of our homes will fall with it.
In its monthly briefing a fortnight ago, the National Development and Reform Commission (NDRC) recommended that Chinese companies boost domestic exploration for steel inputs, explore overseas mineral resources, and expand their sources of imports.
Adding iron ore, Australia’s biggest export source, to the string of brakes already in place on products like coal and wine could be a risky move, the research and consultancy firm said. in energy Wood Mackenzie. Bloomberg at the time – given near record prices and China’s reliance on high-quality supplies from Australia for around two-thirds of its imports.
“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.
MB Fund and MB Super chief strategist David Llewellyn-Smith echoed a similar sentiment in an article for its publication. MacroBusiness today.
“There is no question of whether China is cutting Australian iron ore,” he wrote.
“Only the time has come. As well as what it will do to the Australian economy when it does. “
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“ Three main factors ” behind the cut
According to Llewellyn-Smith, there are “three main factors” behind the cut.
First, he writes, there is the “cold war between the United States and China” which divides the world into “liberal and illiberal economic blocs”.
Australia on America’s side is making China’s dependence on our iron ore “strategically unsustainable.”
“Second, China’s economic development model is running out of steam. Its urbanization is almost complete in terms of construction volume, ”he writes.
“He can continue to oversize, but this is now hurting his long-term growth prospects as poorly allocated capital and debt destroy productivity. He must abandon the building as the main engine of his growth. “
China – which buys 60% of our iron ore – is buying it like never before to create steel for its massive infrastructure projects in a bid to recover from the pandemic.
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The third driver, he says, is the combination of these two factors, “the most forced in Chinese politics.”
“The legitimacy of the CCP will fail as the economy slows down. It is already being replaced by a deliberately fueled nationalism. This makes external conflicts inevitable, especially in Taiwan, ”said Llewellyn-Davis.
“Yet Australia has a virtual veto over Chinese military aggression as long as China relies on it for iron ore.”
The CCP must therefore, he said – probably during the “second half” of the 2020s – break the dependence on the Chinese economy “via a combination of structural decline in steel production, a shift to a larger share of the production of scrap and by seeding new iron ore. developments in the world ”.
What will happen to Australia then?
As “unimaginable amounts of Australian iron ore flood markets outside of China,” global iron ore prices will collapse, writes Llewellyn-Davis.
“China absorbs more than a billion tonnes of iron ore at sea. Australia ships around 700 meters there each year. A significant part of this product will gradually be released to other markets, ”he added.
The biggest blow, however, will be national income – Australia will reap at least $ 150 billion in export earnings this year from iron ore, “almost all” of which will be “wiped out by the combination of iron ore. volume and price pressure ”.
While the impact on our total exports is significant, it indicates that it will remain manageable, likely reverting to the external conditions of 2015.
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“It also gives us a really good guide to what’s going to happen: nominal growth will be reduced; Inflation and wages will be affected for years; The budget will be a sea of red; Mining stocks will fall; Bond yields will fall; The AUD is going to crash, ”Llewellyn-Davis warned.
On top of that, Australian home prices would ‘fall’, ‘devaluing drastically against the world via the currency collapse’.
“How long would that last is the more interesting question. Assuming the AUD can continue to fall without creating inflation, there is no obvious immediate limit to this, ”he said.
China warns of ‘Australia pain’
The current surge in iron ore prices is jeopardizing China’s economic recovery from the pandemic, Chinese businesses and everyday citizens bearing the brunt.
Chinese government spokesperson The Global Times said companies had already raised prices for a wide range of products, including refrigerators, washers and bicycles, citing rising costs.
However, analysts told the newspaper that the latest moves by China to crack down on “speculation and other market manipulation” are about to send “frightening waves across the world.”
The Global Times singled out Australia as the country that will be hardest hit by the crackdown – given that iron ore is such a dominant force in our exports – and accused us of “profiting” from rising prices.
“Australia’s iron ore exports, which have massively benefited from the sky-high prices of its main export, could be among the hardest hit, which has encouraged Canberra officials to continue their relentless provocation against China,” the report said. newspaper.
“While China’s dependence on Australian iron ore is likely to continue for the foreseeable future, despite its efforts to diversify its sources, a sharp fall in iron ore prices would result in heavy losses in revenue for the future. ‘export to Australia, which is already experiencing a decline in trade with China in areas such as wine and seafood. “
He said iron ore prices have fallen US $ 9.25 (A $ 11.93 per tonne) since Beijing took action earlier this month. This could translate into a loss of over $ 2 billion ($ A2.58 billion) in additional revenue for Australia based on the amount of exports to China in the first four months of 2021.
– with Ben Graham