Moves by China’s National Development and Reform Commission and five other government agencies to urgently interview key players in the commodities industry to control commodity prices on Sunday have had initial effects. Under a series of stern warnings from the government, the big futures players in these commodities have had to reign in, with futures prices of iron ore and other commodities falling sharply. This is an extraordinary measure taken by the Chinese government to intervene in the market price through administrative means in the face of rapidly rising iron ore prices and the suffering of China’s related industries. However, experts believe that this approach can only have short-term effects on solving the serious imbalance between supply and demand of iron ore in China and the momentum of price rise, and in the long run, if the relationship between China and Australia, a major iron ore exporter, continues to deteriorate, China’s efforts to seek alternative imports will hardly have any hope of success.
Lifting a stone and smashing its own feet
The sharp rise in the price of China’s iron ore imports may be one of the worst consequences of the deterioration in Australia-China relations over the past year or so. To quickly ease the pressure, five government regulators, including China’s Development and Reform Commission, recently urgently interviewed the heads of relevant key companies, ordering them to stop monopolistic manipulation of iron ore prices to help the government ease the pressure of rising prices and stabilize the market. The effect of the move was evident in the futures market on Monday.
The price of iron ore futures contracts on China’s Dalian Futures Exchange fell 7 percent to 1,049 yuan (about $160) a ton on Monday, down about 20 percent from a high earlier this month, according to the Financial Times and Reuters. lowest point since April 15. Prices of other commodities such as steel, aluminum and copper have also seen large declines.
After Australia called for an independent international investigation into the source of the new crown virus in April last year, China took a series of trade retaliatory measures against Australia, which directly led to a steep deterioration in relations between the two countries. Not long ago, China’s Development and Reform Commission announced the “indefinite suspension” of the Australia-China Strategic Economic Dialogue mechanism, expecting to deliver a blow to Australia and force Canberra into submission. Unexpectedly, Australia’s exports have remained stable under Chinese economic sanctions. The spike in coal and iron ore prices has instead caused significant problems for China, leaving the nation’s coal and iron ore users and the wider downstream consumer industry in a difficult position.
“Belt and Road” becomes a pain point, Australia holds “trump card” to deal with it frankly
China has been Australia’s largest trading partner for a long time. However, in recent years, China’s full-scale penetration of Australia has caused a strong backlash within the country. In the face of China’s all-round economic retaliation, Australia has not given in. In April this year, Australia announced the withdrawal of Victoria’s Belt and Road agreement with China, a move that angered China. Still, Australia announced earlier this month that it may annul the Chinese group’s lease on the Darwin port.
Canberra is still responding calmly after China announced its decision to suspend the Australia-China bilateral strategic economic dialogue altogether. This was largely motivated by the need to play both sides against each other.
In reality, what the China Development and Reform Commission is saying is nothing more than a public reiteration of what has already happened. This bilateral dialogue mechanism has been discontinued since as early as 2017, and there has long been no contact between the two countries above the ministerial level, so the statement at this point is of little practical significance.
Analysts say such a statement is merely a policy-level declaration by China to temporarily freeze its economic dialogue with Australia, which has been suspended for three years, and that the trade relationship between the two sides has not ended. China’s deep dependence on Australian iron ore has deterred it from imposing sanctions. The value of iron ore exports far exceeds that of all commodities sanctioned by China. Australia holds the trump card of iron ore and is uncompromising in its attitude toward China, but it is the successive rising iron ore prices that have put China under pressure.
The iron ore is the killer
China has repeatedly imposed trade sanctions on Australian products, banning imports or imposing high tariffs. But many Australian industries have succeeded in finding alternative markets, sweeping away last year’s slump, with export volumes not even close to pre-sanctions levels. According to the Australian Bureau of Agricultural and Resource Economics and Science, exports of other agricultural products are expected to rise from 2025 as the industry transitions, meaning that the decline in the value of Australia’s agricultural exports will be less than the losses suffered from trade with China.
Conversely China relies on coal to make steel in high demand, with domestic coking coal prices soaring to a four-year high and the need to buy coal from other countries at higher prices. To add insult to injury, iron ore prices have skyrocketed to record highs, leaving China’s steel industry in dire straits.
China, which claims to have a fast-growing economy, continues to see a rise in demand for steel, and Australia is the world’s number one producer of iron ore, so iron ore exports are likely to continue to be spared despite the decline in relations between the two countries. With iron ore imports from Australia currently accounting for up to 60 percent of China’s overall imports and of the highest quality, many analysts say the lack of substitutes is the key reason why Australian iron ore has so far been spared from economic sanctions by China and Australia.
In 2020 China has imposed restrictions on many products exported to Australia, but not iron ore. In fact, iron ore exports make up a large part of Australia’s economy and China has not taken a shot at iron ore because it is China’s weakness in this area.
Dr. Mengjun Liu, from Monash University in Australia and director of the Institute of Continental Economics at the Chinese Academy of Economic Research in Taiwan, told Voice of America, “China has imposed various sanctions on Australia including wine, lobster, coal, timber, these as early as November 2020, as well as wool, barley, sugar, copper ore, etc., but iron ore is not included here, apparently because China cannot find a source of quality iron ore. China would have liked to import iron ore from Brazil or Africa, but on the one hand the freight costs are more expensive and on the other hand the quality is not as good as Australia. Especially with the recent easing of the epidemic and the big rise in raw materials, the price of Australian iron ore has become more competitive.”
Post-epidemic construction demand is urgent, blast furnace operation is difficult to stop
Liu Mengjun mentioned that China has recently claimed that the economy has started to recover rapidly after the epidemic, and the demand for raw materials from foreign orders or domestic production has risen sharply, and it is normal for the demand for iron ore in Australia to rise. In particular, the results of the seventh census show that China’s urban centering will also drive demand for iron ore even higher.
Another aspect that needs to be taken into account is the urban-rural distribution of the population, which currently appears to be about 60 percent of the population living in urban areas, and the potential for future urbanization transition for China,” said Liu Mengjun. The implication is that if we move towards a normal country, about 80% of the population will live in urban areas, as is the case in most advanced countries, so there is still considerable room for demand for quality steel for the construction needed when urbanization is promoted, such as railways, the construction industry, or MRT, and even new demand for wireless networks.”
Another reason why iron ore must always be in supply is the nature of blast furnace operation. Liu Mengjun explained, “Steel itself has a production characteristic of mass production. Once production starts, the blast furnace cannot stop and must continue to produce. Blast furnace is not like general machinery and equipment like power off a break, blast furnace is to keep burning, because once stopped, blast furnace inside the lump, the whole machinery and equipment may be broken. So, the average blast furnace is year-round.”
In this way, iron ore must also meet the conditions of high quality and low cost in order to be beneficial to steel companies.
Politics overrides economy, construction is an image issue
Steel production is at the heart of China’s industrial economy and requires iron ore and coal. Yet many experts on China’s political and economic relations believe that China is actually overproducing steel. If one were to solve the problem of iron ore demand, the easiest option would be to reduce steel production, but in China, steel production is a political issue, not an economic one. Politics will always take precedence over economics.
In an interview with Voice of America, Salvatore Babones, a professor at the University of Sydney and an expert in economic sociology, said, “The fact is that China’s actual use of iron ore is not as high as it needs to be at the moment, and China’s need for iron ore is to maintain regime stability. He needs to project an image of continued high economic growth, continued employment, constant urbanization and modernization, and construction of military equipment, when in fact not only iron ore, but other raw materials are also in supply in excess of actual demand.”
Babs said the pressure of the 100th anniversary of the Communist Party’s founding and the fact that Xi Jinping will face his third term next year require that demand for steel, which represents the level of productivity, can only rise and not fall. He cited Anthem as an example of how the CCP’s need for political control completely overrides the normal state of economic development. Babs said that one solution to steel overcapacity adopted by the CCP is to export excess steel abroad through the Belt and Road. China has about 20 percent excess steel each year, and shipping it abroad for major construction is the best means of depleting it.
China has no say as iron prices reach record highs
A monopolistic pricing system is at the root of the rapid rise in iron ore prices, and Australia has raised iron ore prices sharply in the wake of China’s trade sanctions. In addition to putting pressure on China, it is also using iron ore exports to make up for losses in the sanctioned sector. Since the beginning of 2021, iron ore prices have risen by 21%, and by 130% compared to last year. The fact that iron ore prices have continued to rise so far does not only represent a climb in Australia’s interest, but also means more headaches for China.
In an interview with the Voice of America, Wu Jianzhong, a professor at Taipei University of Marine Science and Technology, said, “Why does Australia have a monopoly on iron ore? Because there are several characteristics needed to extract iron ore. The first is the quality, the second is the cost, and the most important is the pricing power for iron ore. We have seen that in the past, China was only responsible for the import of iron ore, but never had a say in the price of iron ore. This year, even because of the conflict between China and Australia, Australia can adjust the price upwards or downwards as a market adjustment, but China has no way to set the price for such a monopoly resource. So although China is tough in economic or diplomatic terms, when it comes to iron ore, China has no say.”
Local development is not cost effective, and it is difficult to recycle iron scrap for emergency purposes
In response to the plight of rising iron ore prices, China is planning to increase its ore self-sufficiency. China has its own iron ore mines, but they are difficult to mine because they are mostly buried deep underground. In addition, the tax on Chinese mines is between 20-30%, which is very costly, and the quality of the ore is too poor for blast furnace applications, so it is better to mine it yourself than to import it. China has also managed to reward the supply of iron scrap in an effort to shift from iron ore-consuming steel production to producing steel from scrap and reduce its dependence on imports, but this approach seems unrealistic according to the analysis of experts.
Andrew Gadd, senior iron ore analyst at CRU Consulting, which has an office in Beijing, noted that China has increased imports of recycled iron scrap in recent years, but the scale will only increase by up to 10% in the next few years. China’s iron ore supply currently meets only 20 percent of the needs of steel mills across China, and by 2030, it is estimated to fall to 14 percent.
Regarding the idea of steelmaking from scrap iron, Wu said, “While such an argument makes sense and is in line with Xi Jinping’s thinking of ‘self-reliance,’ on the topic of environmental protection and mining costs, especially to achieve zero carbon emissions as required by carbon neutrality or climate change, if mined from China itself or extracted from scrap steel, it will be a big burden on China’s environmental costs.”
Imported capacity is unstable, and mining is a challenge
In terms of the proportion of China’s iron ore import sources, it appears that Australia accounts for more than 60 percent and Brazil for about 20 percent. But from the impact of the dam collapse that caused the mine collapse and the epidemic, Brazil’s iron ore mining has plummeted and has not yet fully resumed work. Although China has invested in mines as far away as West Africa, including the Simandou iron ore mine in Guinea, which has cumulative iron ore reserves of more than 10 billion tons. But political corruption and economic poverty in Guinea have slowed the development of the Simandou iron ore mine, resulting in no output to date. Analysts at Wood Mackenzie, a global energy analyst, believe that iron ore exports from Simandou will not be available until at least 2026 to 2028.
We see that China can certainly import from Brazil, but in 2019 there is a mine pit collapse in Brazil, especially during the epidemic, and there will be a lot of difficulty in getting back to normal iron ore mining capacity,” Wu said. Not to mention imports from Africa, although China is a good friend in the development of Africa, but because the political and economic situation in Africa is unstable, so the import of iron ore is still difficult. The Australian Department of Industry, Science Energy and Resources has announced that China’s iron ore imports from Australia will reach a new record high this year.”
Experts believe that Australia has now successfully found alternatives for a variety of export industries and will eventually be able to find new buyers for its iron ore, while China, on the other hand, will have a much more difficult time finding new sources of iron ore to develop its economy. Although China has launched a two-pronged policy of recycling scrap iron and exploring import sources to find an alternative to Australian iron ore within five years, it seems likely that this will not be the case. According to CRU’s analysis, even if China were able to exclude Australia and ship all other iron ore from around the world to China, it would still need an additional 300 million metric tons of supply to meet demand. While China has frequently hit Australia hard with economic sanctions, the Achilles’ heel of iron ore not only bleeds China badly from higher prices, but also keeps China in a constant chokehold from Australia.
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