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Could iron ore quotas stop China’s trade bullying of Australia?

In the China-Australia trade spat, Beijing holds most of the cards. China buys more than a third of Australian exports – but could its reliance on iron ore from Western Australia be used as leverage?

 In the China-Australia trade spat, Beijing holds most of the cards. China buys more than a third of Australian exports – but could its reliance on iron ore from Western Australia be used as leverage?
Garry white employee

by
Garry White

in Features

17.12.2020

As the US pressures its allies to shun Chinese-made technology – and attempts to starve funding to companies championed by the Communist Party – things are likely to get tricky for Canberra as geopolitics increasingly trumps trade.

China buys more than a third of Australian exports, so its economic success relies on the approval of Beijing more than any other western nation. These exports make up about 7% of the country’s GDP. As relations between the two countries continue to deteriorate, could iron ore be used as a defensive weapon by Canberra against China’s trade bullying?

The Australian economy is emerging from its first recession in almost 30 years. It was the only major economy to avoid a recession during the 2008 global financial crisis – mainly due to demand from China for its iron ore and other commodities. But the economic fallout from the response to the Covid-19 pandemic pushed the country into recession earlier this year. China’s increasingly aggressive trade actions threaten to derail its recovery.

Joining forces with Trump

Although relations have been fractious for a few years, things took a turn for the worse in April after prime minister Scott Morrison defended the “entirely reasonable and sensible” call for an investigation into the origins of the Covid-19 virus in China. This followed Donald Trump’s accusation that Beijing could have done more to prevent the deadly spread of the disease into other nations.

Backing the US government, Australia called for an overhaul of the World Health Organisation - and suggested appointing investigators akin to “weapons inspectors” to investigate the source of significant infections such as Covid-19. This riled Beijing - and Australia then endured a wave of serious cyberattacks. Canberra claimed these were so coordinated and advanced they could only have been carried out by “countries”.

Beijing then started introducing tariffs on Australian goods. It first suspended beef imports from four meat processing plants, before slapping a tariff of 80.5% on Australian barley exports. Then followed trade barriers on dairy products, timber, coal and cotton – with tariffs of up to 215% introduced on Australian wine last month. Yet, Australia’s most important export – iron ore – remains unaffected by the dispute so far.

About 40% of Australia’s exports to China by value come from iron ore, an essential steel-making ingredient. The commodity is the most important fuel for China’s growth and development, as it continues its massive infrastructure and construction projects. Although Beijing appears to hold all the cards in this trade dispute – iron ore is clearly its Achilles’ heel.

Empty threats

 Communist Party mouthpiece the Global Times threatened that China could seek alternative suppliers of iron ore earlier this year. But this is pretty unrealistic. China needs Australian iron ore to continue its economic ascension as much as Australia needs access to China’s marketplace.

Australia has not responded in kind by introducing tariffs on Chinese goods. Its government understands that, ultimately, tariffs are paid by Australian consumers. But, as the dispute escalates, there have been increasing calls to use this Chinese dependence as a defence, with one Australian commentator referring to iron ore as the country’s ‘A-bomb’.

No realistic alternative

Australian iron ore from the Pilbara region of Western Australia is physically close to China for transport by sea than the world’s other major producer, Brazil. Mines in the region – operated by companies such as BHP Group, Rio Tinto and Fortescue are efficient and low cost. Brazil is still suffering from disruptions due to Covid-19 and potential mines in African countries such as Guinea will take many years to construct – and even longer to ramp up to full production. Australia’s Pilbara mines are therefore an essential supplier of China’s iron ore.

One potential avenue that Canberra could pursue to pressure Beijing’s growth ambitions are export permits, which could be introduced under the cloak of environmental legislation.

These permits could limit exports of the commodity in such a way that this will not hurt its miners, as reducing supply will also boost prices. Although a dangerous manoeuvre, even its prospect could help to realign the power imbalance in the spat – and boost the chances of a negotiated solution, it has been claimed. This may help industries other than mining that are currently under Chinese attack.

After all, China’s thirst for iron ore continues unabated, with demand actually boosted by the pandemic. Infrastructure spending lies at the heart of Beijing’s pandemic recovery plan – so the country’s iron ore imports rose 10.2% year-on-year in the first 10 months of 2020.

Chinese steel demand is expected to grow by 8% this year following the post-Covid-19 investment in infrastructure. Consumption is also expected to grow markedly next year too, although at a slower pace than this year, according to Dutch bank ING.

However, the Australian government has been canny so far in its limited retaliatory moves, despite the massive market power it has in iron ore – and China’s dependence on the commodity. Any threat to limit iron-ore exports will certainly provoke Beijing into further retaliatory acts.

In 2018, Mr Morrison joined Donald Trump in his criticism of the World Trade Organisation (WTO), claiming that the global trade system under the WTO had ‘failed'. Yet, last month, Mr Morrison urged the organisation to bring China into line.

This clearly is the only way forward – and calls to weaponise the iron-ore market are likely to remain on the fringe – quite rightly. Canberra would be foolish to do anything that could maim its golden goose. For now, its options remain limited.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

A version of this article first appeared in the Daily Telegraph.

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