China to dump Australian iron ore as it looks to Africa

by Chris Becker

One of the major takeaways from the coronavirus epidemic has been the inability of Australian politics to adopt a more Machiavellian method in dealing with Communist China. There are many layers to Australia’s relationship with the Middle Kingdom, but the most brutish is the amazing amount of iron ore that is pumped into China in return for an equally tremendous level of terms of trade. This, in turn, creates wealth for Australians, but at what real cost?

As Western nations realise they need to pivot away from a just-in-time supply chain that has China at one end and literally mouths, hospitals and other critical goods at the other, Australia needs to be aware of its perilous relationship with the virulently communist Chinese apparatus, that has no compunctions in seeing its own geopolitical goals met at the expense of all others.

This is the very bottom line of Machiavellian politics – advance your state at the detriment of others, and use whatever means are necessary for those ends. In Australia we’ve seen the nefarious use of decades of soft influence at every level of politics and media when any criticism of the handling of the coronavirus by the CCP flips into a hard-line anti-racialist attack that seems highly co-ordinated in ensuring that real debate is obfuscated. It doesn’t take much to cloud this even further when you strut out the Pauline Hanson’s or use terms like Wuhan flu in a chest beating way to deal with these very carefully prodding of hornet’s nests.

The recent increase in defence spending by the Morrison government (that first, has had almost zero criticism from mainstream media analysis, except the usual Chinese influencers like Sam Dastyari and secondly, dwarfs any expected increase in Jobkeeper or other deficit spending measures to keep or move Australia’s economy into a more sustainable direction) showed how the usual way of dealing with China – upfront and brash, echoing US interests and methods – has failed to garner the longer term under-handed response required. Instead we’ve seen import bans, increased tariffs, targeted reduced demand for certain products, plus travel warnings that could affect the tourist industry amongst other responses, except touching the third rail of dual reliance – iron ore.

Because China needs that iron ore to literally build its economy. Australia needs the proceeds to keep its terms of trade elevated or it will suffer a run on its currency, higher external inflation and much lower standards of living. It’s a relationship that risk managers would consider fragile in the extreme given the huge numbers involved, even though the existential benefits are the basic drivers of each economy. With Brazil unable to ramp up its supply due to the disastrous internal response to the coronavirus, almost on par with Trump’s malfeasance in dealing with the outbreak, the reliance on Aussie ore is higher than ever.

But recent news shows that the lack of long term planning, of letting a non-existent free market deal with the obvious and dangerous over-concentration of iron ore within the Australian economy could soon bite only one hand of that relationship. Mainly because the Australian hand doesn’t want acknowledge the risk or use it in an under-handed way in dealing the Chinese a blow.

From the Lowy Institute:

China considers diversifying to other iron ore sources, particularly in Africa. For China, the Australian trade dispute is coming on the heels of a trade war with the US, disruption in Brazilian iron ore production, and general global economic turmoil, which all combine to make investment into the exploration and production of African deposits increasingly worth the risks.

The African continent has similar levels of iron ore reserves as Australia, and the majority of these remain untapped. The signs are already there: In May, major Chinese steelmakers called on their government to increase both domestic iron ore production and investment into the exploration and development of iron ore deposits in Africa. In early June, China’s state-controlled newspaper Global Times threatened that China was willing to curb Australian iron ore imports if it felt backed into a corner and would “pay more and spend time to seek alternatives from Brazil or Africa”.

In many ways, this is one of those moments that China has strategically been preparing for since its African engagements began to skyrocket roughly two decades ago. Chinese investments in Africa’s natural resources serve a multitude of purposes – but more than anything, they support China’s long-term quest for self-reliance in key commodities necessary for economic growth, national security, and political stability.

State-owned and non state-owned Chinese firms have already invested heavily in African iron ore to help diversify and secure China’s supply of this key commodity. South Africa is currently China’s third largest source of the metal (albeit a distant third behind Australia and then Brazil) and Mauritania is among its top 15 suppliers. Algeria, Cameroon, Republic of Congo, Guinea, Liberia, Senegal, Sierra Leone, Gabon, Nigeria, and Madagascar all have reserves, many of which are under study or being developed by Chinese companies.

As pointed out, this is not just a “rhetorical leveraging” to put more pressure on Australia, its part of a long game that has been central to the CCP policy in lifting its state above others for decades.

Australian politicians better start thinking beyond the next election, or even the 24 hour news cycle, and ditch the remainder of the failed neo-liberal ideology that has kept it wed to letting the mining industry balance the future of Australia’s economy and welfare on a pin.

And maybe pick up a book written by a certain strategist from Florence, to try to work out how to deal with an aggressive China in the 21st century.

Latest posts by Chris Becker (see all)

Comments

    • DingwallMEMBER

      Bu t but … we can still sell houses to each other and keep watching The Block right?

    • This could actually happen in the very short term as a risk. e.g. Fortescue got a massive mine going in what ? 2 -3 years with a Chinese contract. Wouldn’t take long to swap over instead to African supply . Like students were 40% from China and now gone due to closed borders – it is a business risk to have one major customer..

      • GlendaFMEMBER

        Hahaha, Twiggy’s got a big problem, try enforcing a contract with China!!!!!
        I’m sure there’s a clause in the tiny print that says ‘p1ss us off and the contract is null and void’!!!!

        • Know IdeaMEMBER

          Paper is for presentation, not enforcement.

          To think that words on a page offer certainty is an idea, and when dealing with some parties, a very bad idea.

  1. DominicMEMBER

    It all comes down to greater / cheaper supply. If there are no aggregate increases in global supply, it really won’t make a jot of difference. Will be keen, however, to see how the Chinese go in Africa and whether they’re able to sustain good relations. It’s a tricky place to do business. Will the Chinese ever ship their military over there to ‘protect Chinese interests’ — going to be an interesting world to live in geo-politically this next decade.

    • BrentonMEMBER

      +1

      Sounds great on paper, but real world practicality is another matter.

      …plus, Twiggy will have wasted his time licking all that CCP sack.

      • Reus's largeMEMBER

        I think he must like the taste of Rhino horn powder for all the time he spends on his knees in front of Chyna …..

    • I think the Chinese are good at sucking up to Dictators in Africa, but dealing with any Democratic Nation might be a challenge for them, they need to spruik the benefits of trade and getting something in return for the people (jobs?). Although in Australia, the benefits are tightly controlled by shareholders and only people working in Iron Ore Mining see the rest of the money. If the Chinese start cutting back here on orders as they ramp up over in Africa, that really will be interesting times indeed.

      • Ronin8317MEMBER

        The problem with being too chummy with dictators is they tend to get overthrown, then the Chinese mines and equipment gets confiscated. Most Africans hates the Chinese with a passion.

        • Stewie GriffinMEMBER

          I’ve been saying this for some time… hey guess what I just went looking for them – ALL MY POSTS ON THE SUBJECT HAVE BEEN BLOKCED BY GOOGLE!!!!

          Try searching on

          macrobusiness “Simandou” stewie griffin

          There use to be plenty as I’ve annoyed H&H in the past by saying Simandou has a fat chance in hell of ever being built let alone run for long enough to earn a return without a division of Chinese troops there.

          • Stewie GriffinMEMBER

            I’ve tried various other combinations with and without Stewie or Simandou and they bring up returns. I’ve tried searching on various other combo’s of

            macrobusiness “Simandou” stewie griffin

            eg macrobusiness “GDP” stewie griffin

            And they all work…. can someone please check – I mean I know I’m crazy, but surely there has to be some other explanation other than my posts have been specifically blocked by Google on request by the Chinese Govt?

          • Stewie GriffinMEMBER

            I was noticed by joogle long ago – it is practically worthless as a search engine nowadays except for all the most vanilla of searches. Just try searching for some mildly controversial topic like population group IQ differences, all the significant volume of evidence has been hidden over the past couple years, while fluffy diversity, social construct nonsense has been elevated in its place – and this is on a topic of one of the most measured and confirmed differences in all of psychology and that has been acknowledged to exist as fact by every institute that has ever studied it.

            But you agree – you did the search and got the same result?

          • BigDuke6MEMBER

            Yes I got the same. Sorry for late reply. I despise them and hate to see colleagues paying them a fortune to go higher in searches.

          • Stewie GriffinMEMBER

            You are right – it isn’t just my user name. I just happened to use both Peachy and Msdee Simandou MB when I was checking earlier and Google returned hits for both of them, so I paranoidly assumed it just picking on me.

            But when I just checked other names that posted regularly on Simandou articles, eg Nikola and Brenton, then they also gave no returns, and there was nothing special about me either there are plenty of times they’ve posted against Simandou without any comment from me besmerching the page.

            Maybe it has something to do with the Pay Wall then – only commentators on those unlocked articles get picked up in the search while the articles themselves come up? Looking at the returns for Peachy and Msdee one was a weekend links article and only one other.

            That would make more sense. I don’t know enough about how search engines scrap data or the workings of MB’s site and what is open to it, but it is probably reasonable enough logic for me to take off the tin foil beanie for the evening.

      • DominicMEMBER

        The Chinese like doing business in Africa because it’s simple — in order to get what you want just requires a bribe and generally not that much, in the grand scheme of things.

    • It will probably end the same way it always does in Africa… lots of dead people and failure. The trouble is we get taken out because we have no Plan B or even much of a Plan A. What we need is the mother of all Sovereign Wealth Funds invested strategically and funding projects which benefit us not some foreign tossers (BHP & RTIO looking at you) but with SFM in charge…

      • Reus's largeMEMBER

        AWA, or for those that don’t know “Africa Wins Again”, it does not matter how much you suck up to a dictator, the more you give the more they want. It will always end in blood and death when you run out of the ever increasing “bribe” to continue to do business.

        The problem with dictators is that they are dictators and if you don’t please them then they have the bloodthirsty troops and guns that can take over any mine / business they want and they will do that.

        • Yes but it could be 30 to 50 year game before it falls over, and I’m betting those Chinese are willing to play in Africa, being they think they’re smarter than those before them.

        • The CCP will be far more ruthless in furthering there economic goals by force than the USA was. The US hegemon has at times been brutal but have always been somewhat constrained by domestic public opinion, and the appearance of acting within international law.

      • bolstroodMEMBER

        Far to late for a Sovereign wealth fund.
        Besides , the BHP , Rio Talaban types have this counrty sewn up politically, and pay F all tax.
        The foreign shrae holders Rule.

      • Jevons ghostMEMBER

        When it comes to looking after our own interest we are born losers. In 2012 the ASX-listed Extract Resources was bought out by the Chinese government backed Taurus Resources. That meant bye bye to 640,000 plus pounds of uranium which might have come in handy someday. Right now we have the ASX-listed Cardinal Resources offering up five million plus ounces of gold resource at a bargain price to Shandong Gold, another Chinese government backed entity. Just two examples out of many. So maybe it’s about time that we had an Australian government backed sovereign wealth fund staking claim to the many and varied mineral resources held by Australian resource exploration companies.

    • boomengineeringMEMBER

      Dominic,
      China has the most IO in the world but poor quality and hard to mine. Africa has IO but further to ship. WA has highest grade easy to mine and close to China. Shoot themselves in the foot if they want, why? Strategic tactic or just plain ego ?

      • PaperRooDogMEMBER

        As you know, Chinese companies don’t need to be viable, CCP will just take more money from their own citizens via wage/savings suppression and cover the shortfall. This will further lower China Inc return which is already unfeasibly low (0.2% form memory, definitely under 0.5%).

        Might allow India to import our iron from us & unit compete China

    • Narapoia451MEMBER

      Africa is the easiest place in the world for them to do business – they speak the same language, generally authoritarian control and rampant corruption. Zimbabwe is a great example – make deals, the government ministers etc get a big cut, China sends workers over to strip the place and the local people starve without let or hindrance.

      This is an endlessly repeatable model on the continent. No African dictator is going is going to send their soldiers in to threaten the Chinese interests and risk China putting a boot to their neck. Conversely, the local leaders may be more expensive to to keep on side than the politicians here in Aus but China will pay as it’s a simple cost of doing business for them with comparatively few complications.

    • I was, perhaps wrongly, under the impression that China already had some significant iron ore capability in Africa, with attached mainly Chinese workforce, railways and ports. All built by China.

    • Peter SMEMBER

      Chinese SOEs have been all active over Africa for more than a decade and in many places like Kenya, there is serious migration/colonisation ongoing.
      Rio and Sundance, which owns 85% of the very rich hematite Mbalaam project in Cameroon and the DRC have each faced the sort of African difficulties that will not escape any Chinese involvement there.
      Brown paper bags abound and the rise of fake religious militias of every shade increase risks on the ground, as is now seen in northern Kenya and Mozambique, where large LNG projects are under threat.
      Unlike Rio Tinto, which is owned by shareholders and only has recourse to global judicial mechanisms and courts to resolve a dispute, Chinese SOEs are backed and effectively owned by the PLA! I am waiting for the moment when China sends expeditionary forces into Africa to “support” the CCP’s business interests.
      This has been the model for Chinese involvement in places like Angola, where Chinese prisoners were quietly shipped in and housed out of sight so that they could work on construction.
      If Australian iron ore operators want to secure their market, they should be taking blocking stakes in Africa, as FMG and others have been doing.
      In any case, comparing FMG’s startup in the Pilbara with operating in West Africa is stretching an analogy to breaking point!

  2. Ukraine fnMEMBER

    All as predicted , Australia better get Nev P and his mates to start suggesting some “Real” idea’s about us building up our own manufacturing and being self sufficient.
    I know it’s a pipe dream but if it doesn’t start to happen in a meaningful way our “Venezuela” future beckons .

  3. BoomToBustMEMBER

    Looks like the 2 speed economic model is starting to fail on a second level

  4. Iron ore is not progressing Australia but merely sustaining it. Iron ore is making the miners rich and China strong.
    Forcing China to source ore elsewhere, while initially painful for both nations, would in the long term be much better for Australia.
    A lower currency would allow other industries to replace Iron ore.
    In fact, iron ore is a finite supply, and in accounting terms, one could argue that exacting a finite resource is a major negative on the nations balance sheet.

    • Lol, maybe SFM and Co will finally come around to building and exporting renewables….good for a laugh. That’s if we don’t get oil shortages before then that hinders building it out. We’re on borrowed time…..

    • fitzroyMEMBER

      I agree. It was better when the Big Miners and Banks didn’t run the place. Tariffs anyone?

    • darklydrawlMEMBER

      If things turn hot with China the US is going to lean heavily on us to stop selling them IO.

  5. Maybe we should start putting a premium on Iron Ore exports, to help finance, the transition in both defence our economy, and compensate for the expense of the Wuhan Virus they knowingly exported on planes to Australia. Australia needs to have a 2, 5, 10, 20 ,50 year plan as well ! But to many of our politicians are too self serving and stupid to operate in the national interest.

  6. A large “pilbara killer” wouldnt be that hard for China to do provided the deposits are close enough to the coast.
    They dont have to worry about domestic or international opinion, the elites will be paid off and PMC s will take care of the rest.
    Look at Grasberg just to our north or what would have happened in Bouganville, without the Aus public outcry.
    The formula is well known and its been western governments who have stopped it in the past by and large.

    • We shoudn’t underestimate just how good we Aussies are at mining – we are very good, and very competitive, even with ‘expensive’ wages and royalties.

      I wonder whether it’s actually going to be hard for an African IO system to actually compete with Australian operations. Maybe the CCP don’t really care.

  7. bolstroodMEMBER

    An Iso Vision.
    I have a Dream. A dream of an independant and strong Australia, powerd by the Sun ,Wind, Tides and Waves.
    An Australia where afffordable housing, justice, health care, a living wage and the right to a job are there for all.
    Where women and men are equal, Science is our guiding principle, and we choose our governing representatives from the electoral roll, not the conmen and power hungry that our outdated political party system throw up.
    A Nation that can feed itself, and export our surplus, A nation that is self sufficient in Industry, and manufacturing, A nation that is not crippled by debt to foreigners. A generous nation that seeks the friendship and good will of our neighbours.
    And a nation that can field a Rugby side that can beat the All Blacks

    • Sounds beautiful, but surely when we become wise and powerful we can convert those mis-guided Kiwis into the sports of Kings and manly men -Rugby league and AFL

  8. Given Chinese mining companies increasing problems in Africa, good luck with that!

    In countries like Zambia, the relationships between the Chinese mining companies and the locals is in the pits, no pun intended. Chinese miners killed, relations with government officials lousy, infrastructure to move the ore from Zambia long, slow and expensive. It’s a mess

    • Certainly however Zambia is land locked and the geographic location is troublesome. Guinea and Simandou are not. They will have there problems no doubt, but a lot less of them.

  9. A few weeks ago there were almost 60 bulk carriers anchored up off the coast of Hedland.
    About 20 today.

    • Were they anchored up waiting to take a shipment or just on standbuy? In oil markets large numbers of anchored tankers in say Singapore or JB usually imply lack of demand/ low prices,
      I dont know if its the same for iron ore?

  10. nexus789MEMBER

    If our dull policy makers bothered to try and understand China it would have become apparent ages ago that China was looking at both Africa and South America for iron ore supplies.

  11. finally wakes up. China been colonising Africa for a decade now for this very reason. it has been planning. it has taken in massive numbers of students on “fulbright” style scholarships to study mining and related degrees etc eg geology engineering etc and send them back… no surprises …

  12. PaperRooDogMEMBER

    Nigeria announced just this week they will sue China for covid damages, so not all rosie for China even at the upper levels, to add to resentment of general populace.