The Chinese government’s attempts to punish the Australian economy have been extensive, but there is one key area it cannot afford to touch.
When the Chinese government began targeting Australian exports to China with punitive trade measures in 2020, there were serious concerns that it could hit the Australian economy quite hard.
With everything from barley to wine, there were few Australian exports to China that did not end up in Beijing’s sights.
Yet despite Beijing’s attempts to hit Australia’s economy where it hurt, for the most part different export destinations were found, and the blows to many industries were taken in their stride. In fact, the embargo on Australian coal imports eventually backfired.
Australia’s exports of energy-efficient and generally cleaner coal were quickly taken over by other importers, such as India and Japan. Meanwhile, China ended up paying high prices for lower quality coal due to such severe market disruption.
But amid all of Beijing’s widespread trade actions against Australia, there have been some key exports they have avoided being targeted – notably iron ore.
A true symbiotic relationship
Despite attempts by the Chinese government to destroy elements of Australia’s export economy in the same way it has done so many others in recent years, in some ways the two nations share a deep dependence on each other.
In its journey towards industrialization and urbanization, China has become the largest consumer of raw materials in the world. It was said in 2003 that China consumed more concrete in two years than the United States throughout the 20th century.
Today, China makes more steel than the rest of the world combined, accounting for 53% of the global total in 2021. Its second-biggest rival is India, which accounted for 6% of global production.
Despite having the third largest domestic iron ore production in the world, China relies heavily on imports to fuel its huge industrial economy.
In 2021, China accounted for 70.1% of all global iron ore imports, with its closest rival, Japan, accounting for just 7.3% in comparison.
On the other side of the ledger, things are also very lopsided towards a nation, but not quite as much as in the area of iron ore imports.
In 2021, Australia accounted for 53.6% of global iron ore exports, followed by Brazil with 20.5% and South Africa with 4.7%.
This puts Beijing in a bind. If it wants to keep fueling its huge industrial economy, it needs Australian iron ore. There are no ifs or buts about it.
On the other hand, this means that the fate of the Australian economy is tied to the fortunes of China’s real estate and infrastructure construction sectors.
Any idea that India or Japan would significantly replace Chinese demand in the event of a Chinese recession is unfortunately simply not realistic. Even if Japan, for example, were to increase its iron ore imports by 50%, it would only represent 5.2% of China’s annual demand.
In fiscal year 2019-20, iron ore was Australia’s top export, accounting for 21.6% of the national total. This data predates the spike in iron ore prices that has occurred since the pandemic, and the country’s economy has become even more dependent on it since then.
While China cannot act against Australia’s iron ore exports in the same way it has other sectors without significantly harming its own interests, there are potential challenges that arise from this reliance on towards China on the way forward.
Covid zero, a slowing China and a sluggish real estate sector
Since the second half of last year, the woes of China’s real estate sector have surfaced, but the problem has been one of slow combustion rather than a more explosive affair.
Although the deteriorating fortunes of China’s real estate sector don’t make the headlines as often as they used to, the problems have not gone away. They have, in fact, continued to get worse.
Behind the scenes, developers have continued to default on billions of dollars in debt and the restructuring of a number of mega-developers continues. Despite some predictions that the Chinese government would bail out the sector in order to stabilize the economy, so far this level of intervention has not materialized.
But amid all the turmoil in the real estate sector, investment in fixed assets (i.e. infrastructure) continued apace, with spending up 6.2% over the year. until May. This has been one of the few bright spots for a Chinese economy still struggling with the pandemic and Beijing’s Covid strategy.
Yet that was not enough to sustain Chinese demand for steel and, by extension, iron ore prices. Currently, Chinese steelmakers are suffering industry-wide losses as costs rise and inventories begin to pile up.
Iron ore prices are around 50% lower than they were when they peaked in May last year, and with other bulk metals falling there are fears they will continue to rise. to lower.
No one can guess where commodity prices are going in this highly volatile and sensitive market. Perhaps Chinese demand will rise on the back of further stimulus now under consideration, or perhaps iron ore will join other rapidly falling commodities as fears of a global recession continue to grow.
Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator