Treasurer Josh Frydenberg is on the hustings lording it over China today. Following yesterday’s righteous cancellation of VIC sub-national deals with the BRI, he appeared to fear no reprisal:
- There will be no disruption to iron ore flows.
- China needs the iron ore and China will keep buying it
This is the base case. But there is a risk case that cannot be dismissed out of hand. China has an iron ore nuclear option if it wants to take it. Li Keqiang talked two weeks ago about the need to increase regulation to address cost pressures in commodities.
What form could this take? The bilateral trade between Australia and China for iron ore has an element of mutually assured destruction to it.
Without Aussie iron ore, the Chinese economy would see a sudden and very severe economic shock as steel stopped being made.
Likewise, but less so, Australia would experience a sudden income and GDP shock though not an especially large jobs impact.
The key is that the volumes of the mutual trade are a very large proportion of the overall import and export mix for both. For Australia, 80% of its iron ore goes to China.
This means that neither could find replacement markets, which hands both parties a loaded gun in a Mexican standoff.
In China’s case, it could elect to fix the iron ore price that it is willing to pay Australian miners. Let’s say at $120. If it did, Aussie miner’s wouldn’t have a whole lot of choice in the matter. To not ship their product to China is to basically shut down.
Such a price would still be above the entire Australian supply cost curve so everybody would face a stark choice. Make lower if still excellent profits or go out of business.
The Chinese gambit would force all Australian producers to either accept the offer or to act as a cartel in response, probably in tandem with the Morrison Government. That would still leave Chinese-owned operations running.
But would Australia Inc. have the gumption to stop shipments in a face-off against a Beijing that was still offering an excellent price?
Australia would go to the WTO. But does that scare Beijing? Meh.
Long term, it wouldn’t do China any good. The last thing it needs is such stark sovereign risks appearing in commodity supply chains upon which it is immensely dependent.
But it might calculate that such a gamble is worth it to punish Australia as an example for all others.
Or, it might act irrationally, after its thirty-year campaign to buy Australian allegiance so fulsomely foundered on the rocks.
Some prices for ya going into the weekend: