Like all trade wars the David v Goliath fight between China and Australia is morphing into a lose/lose game of point scoring with China trying to humiliate its smaller target only to see Australia skip away unscathed, so far.
What started with China banning the import of Australia barley and other farm products has been ratcheted up with the imposition of punitive tariffs on wine and a formal ban on Australian thermal, or electricity-producing, coal.
The net result of China’s tariff attack and import bans has been totally negated by a sharp rise in the price of Australian iron ore, causing the Chinese Iron and Steel Association (CISA) to cry foul and call for government intervention.
The problem for CISA is that iron ore is sold in an open market which China helped create when it dismantled the decades old annual price and tonnage setting system developed between Australia and Japan.
An open market, which includes trading on Chinese commodity exchanges, was supposed to provide greater pricing transparency for a commodity previously set in meetings between miners and steel mills dubbed “the mating game”.
Coal Prices Fall ….
Having started a trade war with one of its major commodity suppliers China is now discovering that it’s not the only customers for Australia’s exports with ANZ Bank noting earlier today that while the ban had a short-term detrimental affect on thermal coal prices the decline was now being reversed.
According to the bank the price of coal exported from Australia’s major thermal coal port of Newcastle fell nearly 15% to about $53 a ton in October while Indonesia coal prices rallied.
“However, as Chinese buyers adjusted their sources other markets tightened up,” ANZ said.
… And Rise
“This saw Australian exporters find new homes for their products. Newcastle prices have subsequently rallied more than 50% to be trading around $85/t.
ANZ said china took as much as 30% of Australia’s total exports in 2018 but this market has been falling ever since with the rate accelerating even before the restrictions. In October, only 10% or 1.7 million tons of Australia’s thermal coal found its way to China.
It’s a different story in iron ore with Chinese steel mills being hit with a 35% increase in the price of the commodity since early November to a nine-year high of $160/t, largely a result of a slower-than-expected recovery in exports from Brazil which has been hit by mining incidents and high levels of Covid-19 infection.
The situation has been worsened by strong demand for steel as China stimulates its economy after a Covid-19 slowdown in the first half and the seasonal closure of major Australian iron ore ports as cyclone (hurricane) season starts.
CISA blames Australian miners, especially BHP and Rio Tinto, for slow exports and higher prices with revenue from iron ore sales estimated to be more than offsetting lost sales in other commodities.
Morgan Stanley, an investment bank, estimates that the the seaborne traded iron ore market is currently in a deficit of 80 million tons a year and priced at $50/t above its normal level.
“Clearly the market is pricing in more tightness to come, with speculative inflows on the Dalian and Singapore exchanges driving the price higher, but we forecast a seaborne deficit of just 35m/t next year,” Morgan Stanley said in a report headline “Iron ore defying gravity”.
China’s challenge with iron ore is that Australia currently supplies 60% of the its requirements and finding a replacement will not be easy.
Australia’s challenge with iron ore is to focus on other, smaller, customers in case China imposes restrictions on imports, an unlikely event today given the shortage of supply but a possibility in the future.
The Australian Prime Minister, Scott Morrison, told local radio that China risked damaging its global reputation as a trading partner if its acts of economic punishment toward Australia continued.