Efforts to push back against China’s bullying behavior will ultimately prove futile, with Australia being dangerously indebted to Beijing.
Australia’s cautious and sensitive diplomacy with China took a drastic turn in a new direction last year at the height of the Covid-19 pandemic.
Beijing’s secrecy and revelations about its failed handling of the first epidemic, which plunged the whole world into chaos, have increased pressure for the international community to act.
These calls for an independent investigation into the origin of the coronavirus were led by Australia, which came as a surprise to many given the gentle and gentle approach that has dominated Canberra’s relationship with the superpower for decades. .
Retaliation from the easily offended nation was swift, with a bitter trade war erupting against all but one of the country’s major exports.
And that one act of mercy largely saved the Australian economy from much deeper destruction during Covid-19.
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An extremely lucrative relationship
About fifteen years ago, China began its rapid transformation from a light industrial economy to a heavy industrializing economy, expanding its manufacturing sector with a particular focus on machinery, cars and ships.
This change required huge amounts of steel, which is made from iron ore.
The country’s steel sector, almost entirely owned by the Communist Party, has quadrupled in the space of a few years.
China did not have access to its own high-quality iron ore or that of its existing trading partners, and needed absolutely gigantic quantities to meet growing demand.
Beijing quickly became Australia’s biggest customer for the ore.
In 2000, it was purchasing around 70 million tonnes of this product, a tiny fraction of the 445 million tonnes purchased from Australia in the first six months of this year.
In fiscal year 2020-21, iron ore exports totaled around $ 149 billion, much of which came from the Beijing pocket.
Today, China accounts for more than 80% of the iron ore exported by Australia.
This very lucrative arrangement has served the coffers of the country well and the authors of successive government budgets have come to rely on it.
Iron ore is not a cheap commodity. The price peaked at US $ 229.50 in May. Yesterday it was selling for US $ 94.70 per tonne.
As a trading partner, Australia is in bad shape with Beijing after calls last year by the Commonwealth for an independent investigation into the origins of Covid-19.
Countless sectors, from barley to wine, have been penalized with tariffs, import embargoes and the disappearance of demand as a result.
Iron ore has remained largely spared, however, but China seems increasingly irritated by its dependence on the ore and its imports are starting to decline.
As so many other export markets suffer and the economy itself is on the brink of another recession, it is increasingly important to protect this last major source of income.
The drop in demand will hurt
China currently buys the vast majority of its iron ore from Australia.
They can get some of it from elsewhere, including the smaller but cheaper market in Brazil, but the high quality of the stuff unearthed here is unparalleled.
Demand is starting to slow as China’s economic priorities are tempered by global pressures, the Covid-19 crisis and finally, perhaps most importantly, the woes facing its biggest real estate developer, Evergrande.
“The collapse of Evergrande will ripple through the entire Chinese real estate market,” wrote Professor Robert Powell of Edith Cowan University in an article for The Conversation.
âInvestors and lenders will be more cautious, which could lead to a credit crunch. This could severely hamper real estate development, and hence the demand for building materials, including steel, made from mostly imported iron ore.
Beijing also wants to increase its own production of iron ore, as well as diversify its purchases from other sources.
China is also stepping up efforts to recycle steel scrap which now accounts for about a fifth of its crude output.
And finally, the Communist Party is undergoing reforms that could allow it to soften the era of explosive economic growth in favor of something smaller but more sustainable.
âIt doesn’t take a lot of change in demand to really see a big change in price,â said Michael Thielliant, senior economist at Capital Economics, in a market update in May.
âOnce the appetite for demand, or concerns about demand increases, we might see iron ore prices correct, and we expect it to correct further. The question is just about the timing.