Australia must ready for collapse of iron ore trade to China

According to BofA:

Foreign firms looking to move their manufacturing processes outside of China in the wake of coronavirus could face $1 trillion in costs over five years, according to new Bank of America research.

However, the bank argues that such a move would likely be beneficial for companies in the long term.

Even before the pandemic, BofA’s survey of global analysts found that companies were shifting away from globalization and towards a more localized approach when it came to their supply chains. This was due to a host of factors that threatened the network that supplies modern factories, including trade disputes, national security concerns, climate change and the rise of automation.

However, in a new study, BofA Head of Global Research Candace Browning and her team suggested that Covid-19 has catalyzed the reversal of a decades-long shift in manufacturing from the U.S. and Europe to China.

The report revealed that the pandemic had caused 80% of global sectors to face supply chain disruptions, forcing over 75% to widen the scope of their existing re-shoring plans.

“While Covid has acted as a catalyst to accelerate this change, the underlying reasons are grounded in a shift to ‘stakeholder capitalism,’ concluding relocation favors a broader community of shareholders, consumers, employees and the state,” Browning explained.

While each of these stakeholders was approaching relocation from a different perspective, the analysts observed that they were broadly drawing the same conclusion: that portions of supply chains should relocate ideally within national borders, but failing that to countries deemed “allies,” the report said.

Around two thirds (67%) of participants in BofA’s Global Fund Manager survey thought localization or re-shoring of supply chains would be the most dominant structural shift in the post-Covid world.

Shifting all export-related manufacturing that is not intended for Chinese consumption out of China could cost firms $1 trillion over five years, BofA projected.

The analysts said this would likely reduce return on equity by 70 basis points (bp) and free-cash-flow margins by 110bp, offset by a potentially lower risk premium. This would mean that the negative effects would be “significant, but not prohibitive,” analysts suggested.

Return on equity and free-cash-flow margins are both used by investors to asses a company’s profitability and ability to maintain its day-to-day operations.

In order to offset higher operating costs associated with this mass “re-shoring,” policymakers and corporate management would likely act aggressively, Browning’s team anticipated.

“We don’t expect a silver bullet, but we were struck by the universal declaration (in our survey) of intent to automate in future locations,” they revealed.

“Policymakers are also expected to help through tax breaks, low cost loans and other subsidies with recent announcements to that effect from the U.S., Japan, the EU, India and Taiwan (amongst others).”

On a sector level, BofA researchers suggested that stocks in construction engineering and machinery, factory automation and robotics, electrical and electronic equipment manufacturing, application software and other similar services would all stand to benefit from the acceleration of this trend. Meanwhile banks in North America, Europe and South Asia could also receive a boost from greater economic activity that comes with these changes.

It is happening and will accelerate:

Though not necessarily to home countries.

That means just one thing for Australia. China will decline into the middle-income trap meaning its growth slows even more quickly than it has been and commodity prices will fall away hugely from today’s stimulus highs.

The resulting tearing up of the CCP’s social contract with Chinese peoples – that exchanges freedom for prosperity – will end in the CCP invading Taiwan to rally nationalism in place of political legitimacy.

Warfare between the CCP and north Asian democracies will, in one form or another, end the flow of bulk commodities to China and trash Australian volumes after price.

We should have been preparing for this outcome for years already but we can still do ourselves some good by:

  • massively taxing iron ore today and saving the proceeds in a sovereign wealth fund:
  • blocking all Chinese takeovers and following the US example of non-commodity divestitures;
  • pursuing any and all policies for a lower AUD to preserve and grow all non-commodity, non-China exports;
  • massively incentivising the rebuilding of our industrial base using industry, energy and tax policy.

LOL!

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

    • adelaide_economistMEMBER

      Yep, any Australian with an IQ over 90 is working out how to source anything they want or need from anywhere but China. At this point it is unstoppable.

      • Arthur Schopenhauer

        White collar work. (There’s very little else to automate in Oz.)

        Automate is also code for ‘outsource’ in some Australian companies. 😔

        • Good point.

          Plan B then: make it mandatory for all hairdressers, barbers, nail manicurists, tattoo artists, baristas, masseurs etc etc to have two skilled people to attend to each customer …. genuis, ey?!

      • Ban robots! Ban all machines and we will be back to full employment. It will be great again, just like the 50’s.

  1. TailorTrashMEMBER

    Scomo’s grand plan is way better than any of that.
    Import half the population of China and India .
    A quarter to arrive first to build the apartments for the quarter to follow
    …jobs n growth …and high house ( sh1tbox apartments)……….job done …simples…..

  2. We need to be doing way more than this,starting right now.
    Trade barriers will go up and trade with the china will suddenly hit a wall in the next couple of years as the new cold war accelerates. We need to be preparing for a shooting war with the china in 5 or 6 years, and we need to start now.
    We should seriously consider restricting supply of iron ore now, slow down or stop mining it and ramp up the price to the china with a covid reparations tax. We should be doing all that we can to inhibit the buildup of the China military not supplying them with the means to make weapons. When the China targets Taiwan both us and the USA will be drawn into it. Japan will also have to engage the china as well.
    So lets stop mucking about and get our head out of the sand.
    There needs to be be an immediate ban and deportation today of all students from the china. The china embassies need to made to start closing down and the china spies deported right now. The china agents that have infiltrated this country in the last 20 years as immigrants need to be hunted down and deported.
    There is no doubt this country is riddled with the china agents and they need to be expelled.
    In 5 or 6 years our troops and navy will be in conflict in the Pacific. I am certain of it.

    • Arthur Schopenhauer

      The internet will continue to bifurcate. The choice will be the US ‘Corporate Feudalism’ or Chinese ‘Authoritarianism As an App’.

      Very separate ways of addressing the same problem of keeping a small cohort in power.

    • Don’t think so,
      our subs won’t be ready until 2035, and our 1960 ships will only be available in mild weather.
      And all those living near Sydney Harbour will decide not to go as the coffee on the ships is not good enough and they won’t let them play ‘in the navy’ really loud anymore over the speakers.

  3. robert2013MEMBER

    “We” do not exist. There is no nation to defend. As individuals who are routinely ignored, belittled, defrauded or abused by our “leaders” and by one another, many of us are no longer interested. Social cohesion as measured by average number of close friends and participation in community organisations has been declining for a long time. I do not need to read advice on how Australia needs to change, fun as that discussion is, what I want is a discussion that can help inform investment theses. If I wanted to change Australia I’d be an activist not an investor. Go long agricultural land and gold? Short iron ore and apartment builders? When?

    • All too true. Gold and agricultural land is a solid base to prepare from. But you may just need to defend both — and if you get a collectivist Govt in power your land may not be yours for very long. The status quo will end – I just hope it’s orderly when it does.

      • The status quo will end – I just hope it’s orderly when it does.
        That’s a bit of an ask isn’t it?
        The world has never previously known such crazy times when the cost of capital was negative and yet you hope for an orderly unwind, just how the F is that going to happen?
        My plan is to profit from the disorder.

        • My plan is to profit from the disorder.

          Fill a shipping container with bottles of gin or another hard tack. You’ll sell them at 10x the price after a collapse and when growing sugar becomes problematic as fossil fuels become expensive/unobtainable. Rich!

          • Nah stockpiling contraband, guns and ammo is more my style.
            But I’m equal opportunity, I will sell to ensure personal safety and I will sell to arm the revolutionaries.
            You know what they say about Capitalists, They’ll sell you the rope to hang them with….that’s my chaos survival strategy.

    • Totes BeWokeMEMBER

      I hope you lose everything you’ve invested in because you failed to protect it by protesting against what matters.

      You’re exactly the kind of human that’s bringing this country to it’s knees.

  4. Would these other countries not next iron ore to build these factories?
    Also i expect at some stage china to be on a.sanctions list for iron ore…. you know, stuff u need to build tanks.

    • Chyna would just come and get it because its there’s you know, Australia was always part of Chyna way back before the tectonic plates ripped it away to where it is now. But Australia still belongs to Chyna.

  5. China is irrelevant to iron ore trade — aggregate demand across the globe is what matters. If demand drops in China and doesn’t increase elsewhere to compensate then, yes, overall dirt exports decline. Trade in commodities is fungible.

    • Problem is a massive chunk of that aggregate demand is China building endless overcapacity, growing year on year. Take that out and iron ore is in massive oversupply.

      • Don’t disagree – which is why the caveat that aggregate global demand is what matters.

        The truth is we (collectively) have been over-building for years, courtesy of cheap money – not economic progress, as many imagine. This will end badly for people in the building trade, residential, civil contractors, engineers etc. If I were in the middle of my career I’d be looking to the future and planning accordingly.

  6. So let me understand this hypothesis.
    The volume of products originating from Asia will continue to increase but the focus will shift away from China.
    Or in other words the infrastructure required for volume manufacture will be replicated in other Asian cities as Chinese market share declines.
    If I’ve got this right so far:
    What part of this continued increase in Asian Infrastructure leads to a decrease in Iron Ore demand?
    Sometimes you guys need to put your thinking caps on before once again doning that tattered anti China ideologue rag that you tie around your forehead as some sort of tribute to Che Guevara . To be brutally honest the look does nothing for you.

  7. massively taxing iron ore today and saving the proceeds in a sovereign wealth fund

    ✅ excellent idea, but requires more than the minuscule gonads possessed by out current leaders, methinks….

    • Yes, the last attempt at a proper resources rent tax resulted in the neutering of the leader. And, worse, the traitor that took power sold the nations soul and cruelled any chance of meaningful reform. Gillard was a shocker, virtually criminal conduct and all about ascending the throne. I said at the time that it will take a generation and a crisis to get back to the reform stage. My timing may be out. Henry in full.

      • Totes BeWokeMEMBER

        Gillard was an absolute shocker.

        Reflecting her character is what she did to Wilkie. Promising pokie reform in exchange for his support to give her government. She dragged him along with promises, and reneged as soon as she didn’t need him.

        Now she’s Chair for beyond blue, where under Kennett, much of the focus was on male suicide; the highest in the world. An anti male feminist prime minister responsible for immeasurable pain on men. Check out their website. I don’t know for sure, but I’d be reasonably certain it didn’t look like that under Kennett.

        I have zero respect for anyone with a good word about her. She is a piece of work.

        • As time progresses my loathing increases, and that’s me as a strong supporter of proper feminism not the virtue signalling shallow rubbish. The shallowness of her character was established very early in her professional life – her dismissal (or whatever replacement weasel words) from Slater and Gordon followed a recorded interview with partners about her conduct including not opening a file that handled corrupt union slush funds. Through a litany of grasping actions as she climbed the ropes and continued with the sort of fake feminist trolling in the misogynist parliament speech. Pure shallow politics. Exposed by Susie O’Brien and others for what it was – just fake on fake. https://www.heraldsun.com.au/news/opinion/julia-gillard-the-goose-over-easter-bunny-kyle-sandilands/news-story/fa474085686c1609ce46b605020a698a?sv=46c0729540135a891711e90f97ee10c1

          • Totes BeWokeMEMBER

            “me as a strong supporter of proper feminism”

            I don’t know anyone who doesn’t believe in proper feminism. People like Gillard take the plight of women back many steps, and make good men resist any change. As long as feminism is Gillard, Wilkinson, MSM’s, etal’s brand, most men aren’t interested.

      • pfh007.comMEMBER

        By the way that post was over 5 years ago.

        So we are talking about many many billions of missed revenue already.

    • Totes BeWokeMEMBER

      Rudd and or Gillard rolled over in about 20 minutes.

      Despite being able to call a press conference at whim, all the available money to advertise, they couldn’t present a narrative to convince Australians that getting money for our resources is in our interests.

      Rudd and Gillard wrecked the Labor party and this country in that short few years.

      • With respect, please don’t lump Rudd and Gillard together. The Labor machine crushed Rudd when reform threatened the machine’s vested interests. To his credit he was able to reform (partially at least) the leadership voting rules. Agree though, the narrative was tragic and the costs are mounting.

        I know I have an unpopular opinion on this but stand by it. Good grief – Gillard’s ascension to deity levels is as astonishing as Rudd’s demotion.

  8. We had a recent client that wanted to move manufacturing into Australia.
    There is only 2 problems we needed to overcome:
    – Cost was double
    – We don’t have the full capabilities
    Apart from that its a nice idea.

    • Arthur Schopenhauer

      The second item is the real problem. There is no supply chain, broad skills base or plant. Top that off with not a single Gov policy to support it.

      It’s like wanting to make pancakes and realizing you don’t have a mill to grind the wheat kernels into flour.

    • Let me politely suggest a possible third problem, which is, that those individuals contracted to investigate this manufacturing opportunity are clueless as to how to actually achieve the stated goal. They over estimate their understanding of the tasks and underestimate the actual difficulty in achieving the tasks. A sort of corporate Aussie Dunning Kruger effect.

  9. Display NameMEMBER

    Many countries have got manufacturing bases by government picking winners either directly or indirectly.

  10. There’s been no real pivot from China and I doubt it will happen.

    China is probably where you want your manufacturing to be because they’ve defeated the virus.

    Europe, the Americas, India are in chaos.