Bully in China cries foul
Bullies always cry foul when the tables are turned. While a bullying China imposes its politically motivated trade-war tariffs and bans on those Australian exports heavily dependent on the Chinese market, Chinese authorities are now whingeing about the record high market prices Australia is getting for the iron ore China needs to support its post-Covid economic recovery infrastructure program.
Early this month, Chinese officials told BHP and Rio executives that ‘a new pricing mechanism must be established’ as current prices, influenced by Australia’s ‘near monopoly’ position, ‘are not conducive to the long-term healthy development of upstream and downstream iron ore and steel industries’. So while penalising Australia by (falsely) alleging artificial pricing for rural exports to China, it sees nothing improper in seeking to ‘fix’ unfavourably high market prices for iron ore.
To give these complaints some teeth, China announced late in December a five-year plan aimed at controlling at least 20 percent of the seaborne imports that provide three-quarters of China’s steel industry usage. To most commentators, this is an unachievable jump from its current minimal proportion, aimed more at jaw-boning the price down. Nevertheless, it sets out to achieve this target by proposing investment in alternative sources for a large part of the 60 percent of its iron ore imports currently supplied by Australian miners. ‘China will accelerate construction of large iron ore projects in West Africa and Western Australia’, says the Ministry of Industry and Information Technology, curiously omitting the untapped, but problem-plagued, major deposits in northern Brazil; Vale, in Brazil’s south is already a key supplier. At a time when it is encouraging the development of new projects aimed at increased iron ore production to ease price pressures, it is also curbing demand by ‘strictly prohibiting new steel production capacity in China’ and encouraging more electric arc furnaces that use scrap steel – and, potentially, hydrogen. So there is little incentive for the Australian majors to help ease China’s concern about high prices by investing in new projects that, if China’s price attack is successful, would face much reduced returns. The warning from one of China’s official newspapers that ‘With more sources of iron ore becoming available worldwide, Australia’s near-monopoly pricing power will be threatened’ faces the consensus view that ‘China is likely to remain reliant on Australian iron ore for the foreseeable future’.
If China does proceed with plans to control more of its steel-making raw materials by increasing its ownership of Australian iron ore resources, it will be the triumph of hope over experience. As the Australian’s Nick Evans has pointed out, a decade ago, when iron ore prices hit their previous peak of $US 170 a tonne, and China set out (unsuccessfully) to dramatically increase its control over its iron ore imports from less than 10 percent to 50 percent, the billions of dollars it spent in Australia brought very little reward; overall the result was financially disastrous except for the links with established miners Rio, BHP and Fortescue that brought financial benefits but not outright control of supply. This left China owning some of the biggest undeveloped iron ore projects in WA that were acquired at great cost – but did not stand up to economic scrutiny. The $US10 billion Oakajee port and rail project remains a pipe dream as does the similar Anketell development where current high prices (and China’s diversification of supply policy) have again raised hopes, while other projects have sunk without trace.
If there were a Chinese textbook on how not to invest in iron ore in Australia, CITIC’s costly experience with Clive Palmer’s Mineralogy would feature prominently. Since acquiring Palmer’s Pilbara magnetite iron ore tenements for $US 415 million fourteen years ago, CITIC has sunk an estimated $US12 billion (and written off more than $US5 billion) into a project that ships magnetite concentrate processed on site from low-grade ore. Disputes between CITIC and Palmer over most of those years resulted in a recent court decision that Palmer is entitled to royalties of about $US1 million a day. And now CITIC is seeking a court judgement against Palmer claiming that it needs to expand the mine into additional Palmer-held tenements in order to be able to continue operating its processing plant. As the US Forbes magazine recently noted, ‘China’s one-sided trade war with Australia has taken a curious twist with a big Chinese company forced to seek the help of an Australian court to keep its Sino iron project operating. … Closure could see up to 3000 job losses, which has seen the WA government try to pressure Palmer into a settlement. … Having Australian politicians on its side in the past has been to CITIC’s advantage in its fights with Palmer – but that was before the outbreak of China’s trade war’.
There is another agenda in China’s campaign for lower prices; the added long-term political objective of undermining the US dollar as the world’s main international trading currency. Under the heading ‘Yuan-denominated iron ore trade on the rise, boosts China’s pricing influence’, the Beijing-controlled Global Times recently claimed that, ‘in a move signalling the rising influence of Chinese currency in pricing major commodities’, Australian iron ore majors Rio and BHP and Brazil’s Vale have completed yuan-denominated sales to China Baowu Group, the world’s largest iron and stee. But the claim by the Global Times that ‘further use of the yuan will continue to tilt the scale towards Chinese steel mills in terms of pricing influence in the global iron ore trade…such a trend will continue alongside the yuan’s continued globalisation’ seems little more than wishful thinking. And while China wages its trade war against BHP’s coal exports, the world’s biggest miner may have little incentive to further help China’s currency ambitions – –— or its desire to control iron ore prices — with more yuan deals.
In any event, record iron ore prices as high as $US180 (against a low five years ago of under $US40) have been a financial boon to the Australian government, whose upward revision of its initial assumptions of a decline towards $US55 a tonne this year (Citigroup expects the market to hold above $US100 throughout 2021) will mean a significant improvement in the budget outcome, overwhelming the lost revenue from China’s assault on other exports. Not only the Treasurer but also shareholders basking in record share prices for iron ore miners (BHP at above $47 a share, up from a low of $16.60 only five years ago, Rio Tinto at more than $126 and Fortescue at over $26) can reasonably wonder: ‘What trade war?’.
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