Why China needs Australian iron ore for years to come

China is looking to buy iron ore outside of Australia. But how is it really going to play out? (Source: Getty)

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A “winter period”.

This is what should happen to the Australian economy “when” China stops or reduces its imports of Australian iron ore, , director of the Center for Australian Studies at East China Normal University.

Despite the frosty relationship between China and Australia that led to trade restrictions imposed on several key Australian exports like lobster, beef and wheat, the iron ore has remained relatively intact.

China continues to buy huge amounts of Australian iron ore, and in the first five months of the year recovered 444.9 million tonnes. In 2020, China bought 81% of all Australian iron ore shipped overseas.

Export brings in about $ 136 billion to the Australian economy per year and is by far Australia’s largest and most valuable export.

But Beijing said it was growing increasingly irritated over its reliance on Australia’s product of US $ 211.91 per tonne – which is more than double the price of a year ago.

Iron ore prices have set and reset all-time highs in recent weeks, hitting a high of US $ 229.50 per tonne, sparking frustration with Chinese officials who said it would severely punish “excessive speculation, price hikes. prices and other violations ”.

China seeks to reduce dependence on Australian iron ore

By volume per month, however, China has imported less iron ore lately: 89.8 million tonnes in May, compared to $ 98.6 million bought in April and $ 102.1 million in March. Australia’s total imports to China in May amounted to US $ 13.6 billion.

China is also speeding up the recycling of scrap metal. Just over a fifth (22%) of its crude steel produced in China is based on recycled scrap – but China’s five-year “Made in China 2025” plan will raise that figure to 30% by 2025.

“For every ton of steel made from scrap, you save 1.6 tons of iron ore,” said the CEO of Scholz Recycling Group. Rafael Suchan told China World time.

“By 2025, if China’s plan to make steel from scrap metal goes according to plan, the country will save 480 million tonnes of iron ore imports each year. By 2030, imports will decline by 660 million tonnes per year.

Additionally, China has sought to source raw materials from Brazil or Africa, although experts have said alternative markets cannot compare to the quality and volume Australia can currently supply.

So all the signs are there that Beijing will stop buying this resource when it can find a solid alternative.

But will it really happen? If so, how soon and what will happen to the Australian economy as a result?

From trust to suspicion: a rupture in progress

With relations so strained, the two countries seek to diversify from each other – China seeks other sources, while Australia seeks other export markets.

“Either way, this is rational behavior,” said Hans Hendrischke, Chinese business professor at the University of Sydney.

“The strong mutual interdependence was only justifiable as long as the two countries were on good terms and there was mutual trust.

“This basis of mutual trust gives way to mutual suspicion that either country might suddenly stop trade.”

Although Hendrischke believes that we are not in an outright trade war, nor in a hard halt to trade, there is a risk of “gradual reduction in volumes and diversification on both sides”.

But even a gradual decline would hit Australia hard in terms of overall export volumes as well as Australian jobs, the professor warned.

“Western Australia would be particularly affected by the loss of hundreds of thousands of mining-related jobs. Australia would lose its international trade surplus and experience a decline in its standard of living.

Australia’s economy has received a big boost thanks to China’s appetite for iron ore, independent economist.

“There are several reasons why the Australian economy has performed relatively well since the 2020 recession.

“One of these important reasons is the trade link with China which has been vital in helping the economy recover.”

“Many years” before China properly diversified

In the short term, China will not buy iron ore elsewhere in the same volume as it buys it in Australia, according to Shane Oliver, chief economist of AMP Capital.

“It is very difficult for China to move away from Australian iron ore without hurting its own economy because there is simply not enough supply in the world,” he said. Yahoo finance. After all, Australia produces over 50% of the world’s iron ore exports.

“If all the iron ore produced in the rest of the world went to China, it would still only cover 80% of its imports – but of course that would leave none for the rest of the world. “

But in the longer term, China’s desire to diversify will be more of a problem – but even then, it’s not clear that there is enough to stop buying the product from Australia altogether. .

Meanwhile, if the change is gradual, Australia will eventually find other markets for its iron ore, as is currently the case with rising copper exports to India, Oliver added.

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