According to some experts, China “resents” its reliance on Australian iron ore and is now using its market access as a “weapon”. The prices of iron ore have dropped below $200 a tonne for the first time since May. And, as tensions rise between Australia and China, Beijing is threatening to reduce its orders. Iron ore is Australia’s most valuable export with China heavily relying on the product.
The price slummed by three percent to $195 with concerns that China is accelerating measures to reduce its dependence on Australian iron ore leading to the drop.
Chinese policymakers have claimed Beijing is attempting to cut its steel outputs in the second half of this year, partly to reduce carbon emissions.
However, according to Vivek Dhar, Commonwealth Bank’s mining and energy economist, it will be very challenging for China to move away from its more than 50 percent dependence on Australian iron ore in the near future.
Mr Dhar said: “Over the medium term, China could reduce its dependence on Australian iron ore by increasing iron ore imports from other countries, boosting domestic iron ore supply, increasing scrap steel usage and reducing steel production altogether.
“The last two measures are likely to happen regardless of Australia China tensions.”
Australia’s economy heavily relies on iron ore.
The Australian Treasury estimates the value of the market will jump from $103billion to $136billion this financial year.
But, according to Michael Shoebridge, director of defence, strategy and national security at the Australian Strategic Policy Institute, China is “deeply unhappy” with the fact the country has limited options when it comes to iron ore.
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“Getting Brazil up to scale reliability is very difficult and even if they are bringing on new African deposits, it can’t replace the competitive price and level of volume that Australian miners have.”
Mr Shoebridge also suggested that while China will do its best to reduce its iron ore orders from Australia, it will be hard with the scale of construction still planned in the country.
He said: “They really resent the dependency and resent the price of iron ore.
“But when you look at what they are still doing and the scale of urbanisation that is still going to happen over the next couple of decades – they are still putting hundreds of millions more people in cities and cities are based on steel and concrete and their export engine still requires steel too, so they can’t get away from needing iron ore.”
He continued: “Australia’s investment in large-scale production means little escape for China from Australian supply.
“There is a reason the Treasury puts projected prices in of $50 a tonne as it knows the current price levels can change markedly, but the good news is Australian miners remain profitable even below $50 a tonne.”