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‘Wishful thinking’: Why China needs our iron ore for ‘many years’ to come

China's looking to buy iron ore from somewhere other than Australia. But how will that really play out? (Source: Getty)
China's looking to buy iron ore from somewhere other than Australia. But how will that really play out? (Source: Getty)
  • Former Treasurer Wayne Swan and Antipodes Partners portfolio manager Sunny Bangia will be discussing China’s growth and investing opportunities at the Yahoo Finance Live Summit on 17 June, 10am AEST. Submit your questions here.

A “wintry period”.

That’s what’s expected to happen to Australia’s economy “when” China stops or reduces its imports of Australia’s iron ore, according to Chen Hong, the director of the Australian Studies Centre at East China Normal University.

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

China’s still buying huge amounts of Australian iron ore, and in the first five months of the year snapped up 444.9 million tonnes. Over 2020, China bought 81 per cent of all the iron ore Australia shipped overseas.

The export brings in about $136 billion to Australia’s economy a year, and is by far Australia’s largest and most valuable export.

But Beijing has indicated it’s growing increasingly resentful of its dependence on Australia’s US$211.91-a-tonne commodity – which is more than double the price of a year ago.

Iron ore prices have set and reset record-high prices in recent weeks, reaching a peak of US$229.50 a tonne, prompting frustration from Chinese authorities who said it would severely punish “excessive speculation, price gouging and other violations”.

Also read:

China looking to reduce reliance on Aussie iron ore

By volume per month, however, China has been importing less iron ore as of late: May saw 89.8 million tonnes, down from $98.6 million purchased in April and $102.1 million in March. Total imports from Australia to China in May came to US$13.6 billion.

China is also ramping up its recycling of scrap steel. Slightly more than a fifth (22 per cent) of its crude steel being produced in China is based on recycled scrap steel – but China’s five-year ‘Made in China 2025’ plan will see this increased to 30 per cent by 2025.

"For every ton of steel that is based on scrap steel, you save 1.6 tons of iron ore," Scholz Recycling Group CEO Rafael Suchan told China’s Global Times.

"By 2025, if China's plan to make steel from scrap goes as planned, the country will save 480 million tons of iron ore imports each year. By 2030, imports will decrease by 660 million tons annually."

Furthermore, China has been looking to source the commodity from Brazil or Africa, though experts have said alternative markets can’t compare to the quality and volume that 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 that really happen? If it does, how soon – and what will happen to Australia’s economy as a result?

Trust to suspicion: A breakup underway

With relations so strained, both countries are looking to diversify away from each other – China is seeking other sources, while Australia is seeking other export markets.

“In both cases, this is rational behaviour,” said University of Sydney Business School professor of Chinese business Hans Hendrischke.

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

“This basis of mutual trust is giving way to mutual suspicion that either country might suddenly interrupt trade.”

While Hendrischke believes we’re not in an outright trade war, or a sudden stop of trade altogether, there is a risk of a “gradual winding down of volumes and diversification on both sides”.

But even a gradual decline would hit Australia hard by way of overall export volumes as well as Aussie jobs, the professor warned.

“Western Australia would be especially hard hit by losing hundreds of thousands of jobs related to the mining industry. Australia would lose its international trade surplus and experience a drop in living standards.”

Australia’s economy has been given a significant boost thanks to Chinese appetite for iron ore, independent economist Stephen Koukoulas noted.

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

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

‘Many years’ before China properly diversifies

In the short term, China won’t be buying iron ore from somewhere else at the same volume they’re buying it from Australia, according to AMP Capital chief economist Shane Oliver.

“It’s very hard for China to switch away from Australian iron ore without damaging its own economy as there is simply not enough supply globally,” he told Yahoo Finance. After all, Australia produces more than 50 per cent of global iron ore exports.

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

But in the longer-term, China’s desire to diversify away will present more of an issue – but even then, it’s not clear that there’s enough to completely stop purchasing the commodity from Australia.

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

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