China will never cut off Aussie iron ore. But the US will

Let’s get a few things straight. In recent times we’ve seen a swag of analysts and apologists grabbing at the pearls as they worry that “China will cut off Australian iron ore”. Some are even contending that the recent slow disembarkation at Chinese ports is evidence of such, even though delays have hit ships from all nations.

Rest easy. The CCP cannot limit Australian iron ore, let alone cut it off. To do the first would be to hand untold riches to Australian miners as the price immediately doubled and tripled. To cut it off would send the price above $1000 per tonne and bankrupt Chinese steel mills, derail the Chinese economy, and threaten the very existence of the CCP as it lost access to its stimulus lever, the fulcrum of its political legitimacy.

Sure, long term, China will demolish the iron ore price anyway. As its economy sinks into the middle-income trap and by 2030 stops growing at all. It will help fund new supply as well. So $20-30  iron ore is inevitable in the long term.

But there will be no sudden stop in iron ore trade before then coming from the Beijing side. If it comes at all, it will come from completely opposite direction. To wit, via the FT:

The US government has sanctioned China’s biggest chipmaker, dealing further damage to the country’s semiconductor industry after cutting Huawei off from its chip suppliers.

On Friday, the US Department of Commerce told companies that exports to Semiconductor Manufacturing International Corporation (SMIC) posed an “unacceptable risk” of being diverted to “military end use”, according to a copy of the letter seen by the Financial Times.

The move threatens to cut off China’s biggest chipmaker from crucial US software and chipmaking equipment. Companies now require licences to export such products to SMIC.

Let those words sink in for a bit, especially “posed an “unacceptable risk” of being diverted to “military end use””.

Can you think of a single item of global trade that violates that principle more than iron ore? Not only does iron ore directly keep the CCP in power by supplying the key input into the building stimulus economy upon which its political legitimacy squarely rests, but it is also obviously used to create the very aircraft carriers, missiles, guns and bullets that are pointed straight back at the US (and us).

In fact, there is no faster way to plunge the CCP into crisis than to block the flow of iron ore from Australia to China, which constitutes 60% of its supply. Not even oil. It is incredibly easy to do it because it is so concentrated. Just park an aircraft carrier off the Pilbara for a few months and, voila, the greedy little sellout Downunder is back in the US imperial fold as the CCP totters.

In truth, it would never come to that. A quiet call from POTUS to APM with the suggestion that such outcomes are possible would be enough for a self-imposed blockade.

We’re not in immediate danger of this happening. Not until it comes to war in the Taiwan Straits, at which point it is near certain. Via Bloomberg:

China has intensified its pressure on Taiwan, opening up new fronts in its campaign to bring the island under its control, according to Taiwan’s Mainland Affairs Council.

People’s Liberation Army aircraft have repeatedly breached the median line in the Taiwan Strait between Taiwan and the Chinese mainland this month. The latest actions show Beijing no longer recognized Taipei’s claim to the waters, according to a statement on the council’s website Saturday that cited an adviser.

The incursions by PLA aircraft showed Beijing’s objective was to extend its jurisdiction, the adviser said in the statement. China’s imposition of a sweeping security law in Hong Kong, after a year of pro-democracy street protests, showed its desire to broaden its control, according to an academic report.

Conflict is still a decade away, is my guess. Which is why Twiggy and Gina should float their respective operations now, at peak cycle.

In the meantime, the iron ore risk to the CCP is very important to understanding a couple of geopolitical and economic realities today:

  • This is why the CCP has put more effort into corrupting Australia than any other developed country. Iron ore is vital to CCP strategic interests.
  • It is also why the CCP is more pissed at Australia than anybody else because it has lost this ‘silent war’. COVID is a sideshow.
  • Moreover, the efforts to influence Australian politics will not diminish, they will intensify.
  • The CCP might do this by increasing the great bribe even more but we’re probably beyond that now. The loss of face is too great and the Australian side has woken up anyway, rendering it pointless.

So, if I were the CCP, I would do three things at this point instead:

  • Buy as many Pilbara FE molecules as possible and stockpile them, probably in the form of empty apartments.
  • Concentrate all my efforts on destabilisng WA and quietly promoting secession movements.
  • Unleash a Chinese decoupling on the eastern states of Australia of greater swiftness and severity than anywhere else on earth.

Civil war and economic strife is a far better outcome for Beijing than Australia’s smooth re-integration into the US liberal empire.

David Llewellyn-Smith
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