{"id":69704,"date":"2022-01-06T06:00:42","date_gmt":"2022-01-05T19:00:42","guid":{"rendered":"https:\/\/www.aspistrategist.ru\/?p=69704"},"modified":"2022-01-05T14:59:53","modified_gmt":"2022-01-05T03:59:53","slug":"editors-picks-for-2021-no-end-in-sight-for-chinas-dependence-on-australian-iron-ore","status":"publish","type":"post","link":"https:\/\/www.aspistrategist.ru\/editors-picks-for-2021-no-end-in-sight-for-chinas-dependence-on-australian-iron-ore\/","title":{"rendered":"Editors\u2019 picks for 2021: \u2018No end in sight for China\u2019s dependence on Australian iron ore\u2019"},"content":{"rendered":"
<\/figure>\n

Originally published 3 May 2021.<\/em><\/p>\n

China\u2019s steel industry is blaming the concentrated ownership of Australia\u2019s iron ore mines for the soaring ore price and is calling for Chinese government intervention.<\/p>\n

\u2018We believe that the supply side is highly concentrated and the market mechanism is not working, so we call for the authorities to play a bigger role in the event of market failure,\u2019 Luo Tiejun, vice president of the China Iron and Steel Association,\u00a0told an industry conference<\/a>\u00a0last week.<\/p>\n

The reality is that the market is working well and that the Chinese authorities have much less power to influence it than Luo might imagine.<\/p>\n

Astronomical iron ore prices reflect the inefficiency of China\u2019s own iron ore mines rather than any alleged monopolistic behaviour by the major Australian mining companies.<\/p>\n

It must be galling to Chinese authorities that, notwithstanding their determination to punish Australia for its many perceived sins, their annual imports from Australia are running at near record levels and appear likely to surpass the $150 billion peak reached in the first half of last year.<\/p>\n

The iron ore price has been nudging close to a record US$200 a tonne, more than double the price of a year ago and three times the price expected by the Australian government when it compiled last year\u2019s budget.<\/p>\n

The price is delivering fabulous profits to Australian mines and is also boosting Australian government tax revenues. The cost of extracting iron ore is not much more than US$16 a tonne for BHP and Rio Tinto.<\/p>\n

In any commodity market, the price is dictated by the highest-cost or marginal supplier. After making allowance for quality and transport, all suppliers of a commodity get the same price in an open market, regardless of what it costs to produce. So, the highest-cost producer is the one that would stop mining if the price were to fall, leaving the market short of supply.<\/p>\n

In the iron ore market, the highest-cost producers are all Chinese. China normally takes around 70% of the seaborne trade in iron ore, or around 1 billion tonnes, but it relies on domestic production for a further 900 million tonnes.<\/p>\n

However, around three-quarters of China\u2019s domestic production needs a price of at least US$100 a tonne in order to operate, with some mines having much higher break-even thresholds than that. China\u2019s iron ore reserves are low quality and require expensive heat treatment before they can be fed into steel mills. Production peaked at 1.5 billion tonnes in 2015, but has fallen because of the sector\u2019s poor economics and government efforts to stop shallow strip mining, which is environmentally damaging.<\/p>\n

While the high operating costs of China\u2019s most marginal mines set a pricing floor, the market has been swept along by demand fuelled by government stimulus spending, both in China and across the world, in response to the Covid-19 pandemic, which has fired steel-hungry construction and consumer goods industries.<\/p>\n

Chinese authorities had set an objective of reducing steel production in line with their goal of reducing carbon emissions and particle pollution.<\/p>\n

In the heart of China\u2019s steel district in Tangshang, 150 kilometres east of Beijing, mills have complied with orders to lower production, but that has caused a panic among steel buyers and sent the steel price soaring. Steel mills across the rest of China have been ramping up production in order to take advantage of the strong price. China\u2019s total steel production is running at record levels.<\/p>\n

The failure of the central authorities\u2019 efforts to shut down inefficient and high-polluting steel mills has been chronic since the price boom of 2009\u201310 and partly reflects the fact that local steel mills are more responsive to provincial authorities, for whom they are an important source of revenue, than to Beijing.<\/p>\n

Historically, the iron ore price tracks the steel price, so the current price boom at least partly reflects the tensions in government policy to control air quality and carbon emissions.<\/p>\n

Global iron ore supply hasn\u2019t been especially weak, but it has not responded to the increase in demand both from China and from the rest of the world.<\/p>\n

Australia has been supplying about 60% of world iron ore trade, with exports forecast to reach 900 million tonnes this year. China has been buying up what it can from wherever it can get it, including a doubling of its purchases from India. However, at around 30 million tonnes, India is only a marginal supplier.<\/p>\n

China\u2019s great hope is that Africa will provide some relief from its dependence on Australia. It is looking at projects in Algeria, Congo and Guinea, with the last the most advanced.<\/p>\n

Analysts expect the Simandou project in Guinea, in which Rio Tinto has a stake alongside Chinese state-owned resources group Chinalco, will proceed, with a total cost of around US$20 billion. It is a large and high-grade orebody, although the infrastructure challenge of getting the ore to port is formidable.<\/p>\n

China\u2019s\u00a0Global Times<\/em>\u00a0last week declared that \u2018the exploitation of the Simandou mine in Guinea, with the participation of a Chinese company, is expected to help cut the heavy reliance on Australia for imports\u2019.<\/p>\n

However, the project, which has been stalled for more than a decade amid corruption claims and conflicts between the government and partners, would take several years to complete, and production in the initial phase is expected to be in the region of 100 million tonnes a year, or about two-thirds the output of Australia\u2019s Fortescue Metals Group. It\u2019s not a big enough project to materially transform the global iron ore market or to free China from its dependence on Australia.<\/p>\n

The steel association\u2019s demand that the authorities do something about the surging iron ore price mirrors their response to the iron ore price spike in 2008\u201309, which was generated by Chinese government stimulus spending in response to the global financial crisis. Then, as now, they blamed Australian producers.<\/p>\n

The Chinese government was thwarted by the Rudd government in its attempt to have Chinalco take over Rio Tinto, which it thought would give it the ability to keep a lid on iron ore prices.<\/p>\n

At some stage, China\u2019s economy will move beyond its heavy reliance on construction as the source of its growth and become more focused on services. That might come as a result of a maturing of its economy or it could be sparked by a debt crisis.<\/p>\n

A serious cut in China\u2019s demand for steel and iron ore could see prices plummet to something much closer to the marginal cost of Australian iron ore mines, but such a result wouldn\u2019t come from the interventions demanded by the China Iron and Steel Association.<\/p>\n","protected":false},"excerpt":{"rendered":"

Originally published 3 May 2021. China\u2019s steel industry is blaming the concentrated ownership of Australia\u2019s iron ore mines for the soaring ore price and is calling for Chinese government intervention. \u2018We believe that the supply …<\/p>\n","protected":false},"author":955,"featured_media":64255,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false,"footnotes":""},"categories":[1],"tags":[2212,52,2746,365],"class_list":["post-69704","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general","tag-australia-china-relations","tag-china","tag-iron-ore","tag-trade"],"acf":[],"yoast_head":"\nEditors\u2019 picks for 2021: \u2018No end in sight for China\u2019s dependence on Australian iron ore\u2019 | The Strategist<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.aspistrategist.ru\/editors-picks-for-2021-no-end-in-sight-for-chinas-dependence-on-australian-iron-ore\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Editors\u2019 picks for 2021: \u2018No end in sight for China\u2019s dependence on Australian iron ore\u2019 | The Strategist\" \/>\n<meta property=\"og:description\" content=\"Originally published 3 May 2021. 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