China would be shooting itself in the foot if it bans Australian iron ore

Chances are China won’t act on the indirect threats made in recent days to take Australia’s iron exporters as hostages.

There are two prime reasons for this reckoning:

First, it would set off alarm bells around the world, angering major Western powers (who are already deeply annoyed with the COVID-19 disruptions) and concern the developing nations of South East Asia and Central Asia that are vital to China’s Belt and Road Initiative.

Second, China’s steel industry relies too heavily on our iron ore, there is no supplier able to fill any substantial gap if imports from Australia were markedly reduced, and Beijing’s hopes of revving up its economy depends on plentiful steel supplies later this year.

On the first issue, Peter Jennings, executive director of the Australian Strategic Policy Institute (and former Defence Department official), said in a radio interview during the week that he considered the Chinese threats to be “bluster”.

In reference to the incident in 2012 when China placed restrictions on Philippine banana shipments after the two countries had a naval stand-off over a contested shoal in the South China Sea, Mr Jennings compared that with what Australia is facing today.

“It’s one thing to stop buying bananas from the Philippines as China has done,” he said. “But if you go after Australia you are going after a G20 country and that’s going to be noticed all around the world.”

As, indeed, it already has been.

On Friday, an opinion column in The Washington Post was headlined “China’s attempt to strong-arm Australia should disturb the world”.

We are not alone: the world is starting to take heed of China’s pressure on Australia.

Global Times waves the big stick for Beijing

The Global Times newspaper, the English language mouthpiece for Beijing, set the latest rabbit running when it published an article where it cautioned Australia to “wake-up” and to reflect on its economic links with China, adding that China could “easily turn” to Brazil for iron ore.

No, it can’t.

What it said next was — shall we say? — misinformed: “While China is the only choice for Australia’s massive commodity exports, Australia is not necessarily the only option for China. There are also other countries like Brazil that can supply huge amounts of iron ore, coal or LNG to China.”

Brazil’s iron ore exports have been struggling since the tailings dam collapse in January 2020 at the Brumadinho mine, the deluge killing 257 people, and which led to Vale being ordered to close several mines until they were inspected.

Production in Brazil is still not back to full force; in March, Vale’s shipments were 13 million tonnes short of expectations.

This year, Vale’s operations have been impacted by heavier than usual rain (causing flooding) and by the spread of COVID-19.

There has been a rapid spread of the virus in Para state, which usually accounts for 23% of Vale’s iron ore output.

Plus: it’s a lot further to ship to China than from Australia.

China’s heavy reliance on iron ore from Australia

The virus has also had impacts on iron ore shipments from other countries. Miners in India, Iran and South Africa have all to comply with national shutdowns.

At present, China is reliant on Australia for 62% of its iron ore supplies.

Meanwhile, steel mills in China are ramping up production and on Wednesday iron ore futures at the Dalian Commodity Exchange rose 2.2%.

Singapore-based steel and iron ore data analytics company Tivlon Technologies reported that spot prices of iron ore with 62% and 65% iron content for delivery to China have both jumped 5% so far in May.

In Sydney, UBS analyst Glyn Lawcock said there is not enough iron ore available in the world at present.

“The market is very tight, everyone is running as hard as they can … you couldn’t find a spare tonne elsewhere in the market,” he was reported as saying.

“With the market tight, it is difficult for China to source iron ore from alternative sources.”

In the first four months of 2020, China imported 360Mt of iron ore, up 5.8% on the same months in 2019. In the first quarter, Chinese steel output rose 1.2% year on year.

China imports 72% of the iron ore it feeds into steel mill furnaces.

Australia’s iron ore power

This country is the largest iron ore producer in the world and holds the top resource capability still in the ground (followed in the latter category by Brazil, Russia, China and Ukraine).

But reports indicate that China’s stockpiles of iron ore are now beneath last July’s low.

China consumes 57% the global use of iron ore, followed by India at 9% and the 28 countries of the European Union at 6%.

Meanwhile, Singapore’s Oversea-Chinese Banking Corporation (OCBC) is forecasting that iron ore prices, which Thursday closed at US$91/t for 62% fines, could get back over US$100/t.

If China turned up its nose at Australia’s iron ore, its steel makers would end up paying a lot more than US$100/t.