China needs Australian iron ore. And Australia can iron them out neatly with this advantage

Xi Jinping, china, Scott Morrison, Australia, iron ore

Relations between China and Australia have been going South ever since Australia strongly stood up for its democratic values and called for an international probe into the Wuhan Institute of Virology- the origin of the COVID-19 Pandemic in the Hubei province of China. Chinese State media- Global Times says, “It (Australia) is a bit like chewing gum stuck on the sole of China’s shoes. Sometimes you have to find a stone to rub it off.”

China wants to punish Canberra for leading the global backlash against Beijing. Xi Jinping has imposed tariffs on Australian Barley and banned the import of meat from four Australian abattoirs. But guess what, the Chinese President cannot really punish Australia because the Dragon cannot target the biggest import commodity from down under- iron ore.

Iron ore imports and Steel production are at the core of China’s plan of an economic revival and China imports over 60 per cent of its iron ore from Australia. The road of Chinese economic revival goes through Australia, and by punishing Australia, China itself will have to forgo its superpower ambitions.

Local governments in China are expected to issue so-called special bonds to the tune of 565 billion dollars. China plans to come out of the economic slump that it finds itself in by splurging these proceeds on infrastructure- rail, roads and airports, across the country.

Numerous Chinese provinces, including Shanghai and Beijing, have announced grand plans for the development of massive infrastructure projects. The total infrastructure investment in the People’s Republic of China is expected to hit a whopping 4.8 trillion dollars.

But China needs Steel, lots of it, to build such infrastructure. This is why while Australian agricultural commodities have met with tariffs from Beijing, Australia’s energy and natural resource exports have been spared.

According to Wood Mackenzie, a global energy, chemicals, renewables, metals, and mining research and consultancy group, Australia’s iron ore exports to China have increased by 8 per cent on a year-to-date basis compared to last year.

China is the world’s biggest iron ore consumer, and also the world’s biggest Steel producer- it manufactures 51 per cent of the world’s Steel, a strategic good that is needed for almost everything from cutlery to aircraft, tankers, and surgical instruments.

Even apart from its ambitions to spend heavily on infrastructure for reviving its economy, China wouldn’t want to lose its undisputed global leadership in producing Steel which reached 930 million metric tons in the year 2018.

Thompson, Asia Pacific vice chairman for energy at Wood Mackenzie, however, says that Australian iron is “critical” to the Chinese economy. The reason is simple- Australia is the biggest producer and exporter of iron core, and according to the World Steel Association, Australia managed 60 per cent of the world’s total iron ore shipments last year.

Beijing itself imports more than 60 per cent of its iron ore from Australia.

The next big producer, Brazil lags far behind Australia and accounts for 23 per cent of the world’s total seaborne iron ore last year. As per Wood Mackenzie, Brazil’s iron ore exports are set to dip by 4 per cent this year due to the Pandemic, wet weather and a recent mining accident in the country.

China has few alternatives when it comes to finding an iron ore source, and thus it is unable to punish Canberra even when it really wants to. Thompson said, “Placing restrictions on Australian iron ore imports would hurt domestic steel producers just as the Chinese government is directing stimulus money into construction and infrastructure.”

Last month, a China Iron and Steel Association executive said that China could swap Australian for African iron ore, but there would be a lag of four to five years before the Dragon can tap into African deposits.

Therefore, at least for four-five years, China cannot manage to hurt the Australian economy substantially by cutting down on iron ore imports from down under.

Meanwhile, the Australian political leadership seems confident. Prime Minister Scott Morrison made it clear that he would not be intimidated by Beijing’s “coercion”, and said, “We are an open-trading nation, mate, but I’m never going to trade our values in response to coercion from wherever it comes.”

Morrison is truly standing up for “our (Australian) values”, viz. Democracy and transparency, both of which are alien to China. In fact, China doesn’t have options but Australia does have options, and it can look at diversifying its iron ore markets.

Recently, a report by Grattan Institute, a thinktank linked to the University of Melbourne, concluded that a new Australian green steel industry could create tens of thousands of jobs in regional areas. This means that Australia could consider consuming more and more iron ore in a new green steel industry instead of exporting it to China.

Moreover, Donald Trump has been pushing for treating Steel as a strategic good, thus placing steep tariffs on steel imports. Steel production is rising in the US, but currently, it imports most of its iron ore from Brazil. India wants to emerge as a global manufacturing hub, and has invited Japanese Steel manufacturers to shift production to India.

Australia has lots of iron ore, and its Quad partners- the US, India, and Japan want to cut dependence on Chinese Steel. Why shouldn’t these like-minded democracies consider cooperation in iron ore exports and Steel production? Australia can, in fact, damage the Chinese economy by shifting exports to its friend, India.

China would be shooting itself in the foot if it bans or restricts iron ore imports from Australia, and this why a desperate Dragon can do nothing but look on helplessly as Scott Morrison keeps pushing for holding China accountable for hiding the Coronavirus Pandemic.