China’s spectacular Australian trade war own goal

More Chinese trade war on Australia today with timber and wheat joining various other agribusiness products. Yawn.

It’s not all bad news by a long shot. The trade war has also played a key role in putting a rocket under the iron ore price as traders price in a geopolitical risk premium not unlike oil before US fracking changed the market.

Without being too inconsiderate to those Australians that have been thumped by an irrational Beijing, it is amusing to watch markets price in these outcomes.

So far, and into the future so far as I can see, the net result is a net benefit to Australian trade:

I have extrapolated only as far as March but have included all impacts to date so any further iron ore price rises would lift performance even more.

Things will not stay so rosy for Australia into mid-2021 as iron ore begins to fall back. But that was always coming anyway and it won’t fall as far. The geopolitical risk premium will remain as an offset to all other blocked volumes so long as China’s trade war lasts.

What is even more amusing is that China’s blockade of Aussie coking coal has already triggered huge spikes in Chinese prices for that product. Now with both coking coal and iron ore prices through the roof, Chinese steel mill margins are getting crushed. The Chinese steel market could sustain price hikes through early October but not since:

Meaning margins are getting smashed now:

In short, Chinese interests are suffering as much as Australian are. This is not to say that it will stay that as China refuses any return of students and tourists. That would knock another billion or so off trade per month but we’d still be ahead in national income terms.

Markets have applied the iron ore export tariff for us. Let’s make it official and send the price to $300!

David Llewellyn-Smith
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Comments

  1. happy valleyMEMBER

    “Chinese refuses any return of students and tourists.”

    Let’s hope it stays that way – sick of funding local infrastructure for schools etc for which “PRs”/”visitors” don’t truly put their hand in their pocket for much and swamp the primary and high schools in our area at least.

  2. Iron ore port inventories rising fast and are at pretty elevated levels already. Chances are chinese will start hoarding over the next few months as a cover and wait for vale to pick up production. Australia is not thinking 1 step ahead let alone 2

      • China placed a blanket ban on ALL recycled scrap coming into the country effective May 2020, you know the whole problem with glass and recycling in Australia and the EU – this blocked all steel scrap from coming into China and is the reason Iron Ore has skyrocketed as the entire steel recycling industry got shuttered.

        The ban on steel scrap coming into the country will be lifted as steel (and copper and a few other things) will be reclassified as a “resource” and not “scrap” allowing the industry to start up again.

        This is significant as the latest 5 year plenary focused primarily on their second century shift as its known away from steel and iron ore towards scrap, environmental focuses and recycling.

        They have spent the last 6-12 months gearing up 200 mills to transform into low emission and recycling across the country.

        Worth mentioning the reasons I think.

      • Yeah i would agree with that. Looking at building construction data in china its not fantastic while they are making quite a lot of steel; way more than they need for apartments.

        • Think they would have to stock up to an entirely new level …. well unless they assume the rest of the world will just crumble and carry on doing business after they take Taiwan in a couple of weeks. So thinking about it, you could be correct.

      • There’s an old saying in the commodities industry that goes something like.
        The best cure for Low prices is lower prices.
        A corollary to this is that Higher Prices are the best cure for High Prices.
        what? sounds weird but it’s true and it’s true because Investment hurdles must be overcome before the market will allocate additional capital for the development of additional mines / ports / ships…
        At prices below $100/Tonne Iron ore markets are not motivated to add capacity and it doesn’t matter how much China screams and shouts there won’t be any significant new IO resource developments funded by the global bond markets. However if prices are sustained above $100/Tonne than the market takes notice, If IO prices remain above $150/Tonne then the development market goes ballistic and funds any mining project that even mentions Iron Ore in the prospectus.
        With this in mind the only way that China gets to significantly diversify it’s sources of Iron Ore production sources is by sustaining the price above $150 / tonne until the global bond market gets itself in a frenzy and shots a giant wad of cash over anything remotely Iron Ore related.

  3. The price of Australian coal will go through the roof too.
    The Chinese government will eventually give in on banning Australian coal as people start freezing to death. Then the Chinese buyers will buy as much coal as they can and hoard it.
    The other thing that will happen it that Thailand will start buying Australian agriculture products, then put a Made in Thailand sticker on it, and then on sell it to the Chinese.
    Thats the way things work in Asia and always have.

    • We can take your wine, add a few drops of NZ wine to them, then label them “Made In NZ from local and imported products” just as we do everything else. Our labelling rules are a crock.

    • A few things to consider:
      – Thermal coal prices are not bad at all atm and the rest of the world has a fair bit of it. So the MB potential word of the year “fungible” is in play. They won’t buy from Australia when they can easily get the same quality thermal coal elsewhere. But we get to sell into any holes created as the rest of the world’s power stations aren’t idle.
      – Thermal coal is not easy to hoard. It is prone to spontaneous combustion under the right conditions – possibly why some Australian thermal coal shipments were allowed to unload after 6 months at anchor.
      – Metallurgical coal is not hoardable either ….. coking properties can deteriorate.
      – Met coal prices ex Australia have cranked much higher. As long as China can replace the high quality Aussie Met coal elsewhere (US sourcing etc) they won’t need Australia – but this may only be a relatively short period. Steel production ex China needs to start to grow to allow Aussie Met coal to go to those markets. Currently only China is paying a hefty premium on Met coal to snub Australia.

  4. Xi wants to be the new Mao, and is making the be same mistake as Mao. The curse of the Chinese Emperor have be always been hubris, It does not matter if the decision ends up hurting China, the will of the Emperor is absolute. It will take another 6 months before Xi finally acknowledge it is not working, and blame for ‘Wolf Wankers’ for messing up Sino-Australia relationship.

    • adelaide_economistMEMBER

      As noted by others, Chinese pronouncements on Australia reflect significant psychological projection of their own motivations and actions onto Australia. In the case of iron ore, the odd demands for Australians to “slap themselves in the face” seem quite consistent with this concept.

  5. ASX IO stocks exposure, what’s the best option currently? I notice FMG sp has tripled in last few months, while GRR has tracked sideways. BHP risen moderately over the same period.
    Why would GRR hardly moved while the IO price has doubled?