China to cut off Australian iron ore “mid decade”

The arrogance emanating from Australian commentary about its iron ore shipments to China in recent times has been something to watch. There is a collective failure of imagination in the inability to envision the end of the trade.

Yet that is what will come, in large part. Today Sinocism has some good advice:

  • Julian Evans-Pritchard of Capital Economics wrote in the recent research note “Dependence on Australian iron ore set to decline” that: In the short-run, China has no choice but to grit its teeth and keep buying Australian iron ore, even as bilateral ties continue to fray. But this dependence will diminish over time thanks to increased supply from other sources, greater use of recycled steel and a structural decline in Chinese steel demand. It may be feasible for China to cut off Australian iron ore shipments by the middle of the decade. He argues that the combination of increased domestic ore production, faster adoption of electric arc furnaces that can use scrap steel, expansion of overseas production and a drop in demand could make it eventually “feasible for the country to cut off shipments from Australia and still source enough from elsewhere to meet its needs”.
  • The CCP has hated Australian iron ore gouging for many years but there was never a strategic imperative to fix it. Now there is.
  • The analogy is the semiconductor reliance upon the US which the CCP is also in the process of investing its way out of.
  • In the Xi Jinping era, everything is national security and Australian iron ore now sits in that frame of reference.

I doubt that China could cut off Aussie iron ore fully by mid-decade. But it could very well be in a position to cut off large slabs of it by then.

Consider that by mid-decade Brazil and Africa will have added 200mt of new supply. That can conceivably come straight out of Australian volumes.

There are two other very large swing factors. The first is that Chinese urbanisation is running out of runway. At 64%, it does not have far to get to the typical 80% of modern economies. China could go flat chat to that target and reach it by 2030.

If we consider that there are likely 70m empty apartments, and vast swathes of shiny new infrastructure, then it’s hard to avoid the conclusion that some large slice of the building needed for the last spurt of 200m freshly urbanised citizens isn’t already built.

Sure, China can overbuild, but at some point in the coming decade the pace of urbanisation construction is going to have to slow a lot. When it does, it will knock a huge hole in iron ore demand, upwards of 20% of steel output eventually:

That eliminates another 300mt of iron ore from the seaborne market over whatever timeframe you care to choose.

Finally, there is scrap. Scrap inputs have been growing strongly for years:

The proportion of scrap inputs via EAF and BOF has doubled in a decade. At the current rate of climb, it will be 30% by 2025. Assuming flat steel output, that will knock another 160mt of iron ore out of the seaborne market.

So, that’s 660mt of iron ore that China conceivably will not need at some point in the next decade. As it happens, Australian iron ore shipped 732mt of it in 2020.

Pick your timeframe. Pick your poison. But don’t doubt it. At some point in the 2020s, China is going to demolish the Australian iron ore trade. Now that we have declared for the US liberal empire, it has no choice.

If we had any brains or ethics we’d be saving every iron ore penny today.

Meh, bid up that house!

David Llewellyn-Smith
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Comments

  1. BabundaMEMBER

    In the Xi Jinping era, everything is national security

    Then it should be for us as well.

  2. TailorTrashMEMBER

    Mr Lee Kuan Yew will be chortling in his grave

    ( except we’ll probably be the poor brown trash of Asia by then )

    • Indeed, Rainbow To Arse (aka Lucky Country) seems to be the ruling theory. I hope they’re teaching it to ANU economics freshers. Instead of setting itself up for the century, Australia will be left with pennies. Gillard, instead of condemnation for trashing a modest mining tax, is revered as a Labor “reformer”. Albanese-Chalmers are her faithful inheritors.

    • blacktwin997MEMBER

      Disheartening isn’t it. At least Gina the Hutt and Triggy Follest will be riding high on the sea of tears.

  3. Gra ManMEMBER

    China needs to crush price as well as demand away from Australia and that means that alternatives have to be viable at much lower prices. China has not managed the iron market well over the years at all and has costs itself dearly so maybe they’ve learned a lot for the future, but not yet,

  4. The Travelling Phantom

    I’m sure our nation innovative, highly skilled and educated with great infrastructure and manufacturing will just start building more houses to sell it for each other for higher prices each time. That’ll teach them for not buying our iron ore

      • Here’s a Google Maps link to Simandou. Note that it’s in Guinea’s remote eastern interior.

        The most direct route from Simandou to the Atlantic would be through Liberia or Sierra Leone, which are best known for their particularly vicious civil wars, so maybe not such a good idea. So the Chinese would have to build a very long railway to get the ore to a (yet to be built) port in Guinea. The railway would be vulnerable to sabotage by disgruntled “freedom fighters” in Guinea, Liberia and Sierra Leone who would be justifiably angry at rich natural resources being plundered yet again by distant, corrupt politicians leaving nothing for the locals but displacement and environmental devastation.

        Even if the ore does get to the Guinea coast it’s a long way from there to China. I’m not convinced that Simandou enhances China’s national security.

        • Mining BoganMEMBER

          Just have to look at the troubles with Tonkolili in Sierra Leone. Don’t think they’ve exported for a couple of years now. Marampa too.

        • Frank DrebinMEMBER

          How much would it cost to get the “Freedom Fighters”
          to stir up enough trouble to regularly disrupt the supply chain ?.

          Thinking they might be paid in “US dollars”…..

  5. TailorTrashMEMBER

    Questions from a non economist
    on the $200 per ton

    Is that what is reported as the export value ?

    How much of the $200 actually gets back into the Australian economy and is spent here ?

    Given it’s a very capital intense industry and is probably shipped out in foreign owned and crewed vessels how many wage packets is it estimated it supports …directly and indirectly ?

    • Display NameMEMBER

      It is what is holding up the current account and the AUD as I understand it. There will be nothing holding the AUD if Iron ore falls considerably. Just trillions in way over priced houses …

      • TailorTrashMEMBER

        Thanks Good article that
        $238 b less over statement of $45 bil. Is 193 bil
        Over 10 years …..or say $20-$30 bil per year ( depending on price )

        The profits must have been tidy indeed

        Still a fair slug to lose and will be felt in our hospitals
        and other social assets no doubt

    • Francisco d'AnconiaMEMBER

      Under$10 per tonne is local labour. Good rule of thumb for mining operations is that 1/3 each is spent on fuel, labour and machinery. I’ve done the exact math back in 2010 and made sure to forget all about it. But I’m in the ball park. Plus royalties go to the WA government. And that’s 7.5% of FOB price. That’s another $10+ per tonne at current CIF prices of $200. WA budget should give you exact figures.

    • Francisco d'AnconiaMEMBER

      Oh yeah, plus the corporate tax. Which is huge. There is a tax report produced by the OZ government that lists top 100 or 200 tax payers. Worth a read. But again, I tuned out ten years ago as I got bored.

  6. Their concerns of creating supply chains from Africa and Brazil are:
    – Unstable and unpredictable political and social countries
    – Unpredictable output reliability due to poor practices and infrastructure
    – Not very close which is open to disruption during times of conflict.

      • Shipping cost per tonne is higher (extra $15 per tonne) because of the distance from West Africa and Brazil. In the case of Simandou in Guinea they have to build a 650km railway line (~ cost $6.5 Billion) and a very long 2 km wharf to get to the water depth required for the bulk carriers to be loaded. The 39 bridges, 1000 culverts, 13 passing sidings and 28km of tunnels will be potential targets for the new political/criminal groups that will arise after the line is built.
        Yes the mine has very high grade ore (65% Fe) similar to that from many of the Australian mines) but the reserves at this stage are only 2.4 billion tonnes, or 2 years of Chinese requirements. Australia has 50 billion tonnes of reserves.There was more stability in the price when large mining companies contracted directly to buyers. However if the price on the world spot market dropped below the contract price the Chinese would break the contract. Their bullying business practices sowed the seeds for the massive prices being seen today.