In One Australian State, Trade With China Is Still Booming – The Diplomat

Ships carrying Australian coal stranded off the coast of China have become an apt symbol of the recent deterioration in relations between the two countries. The spat, which began when Australia called for an independent investigation into the origins of the COVID-19 pandemic, has resulted in an unofficial embargo on Australian coal, tariffs of 200 percent on Australian wine, and trade in barley grinding to a near-halt.

Even before the dispute began, jobs at Australian coal mines in Queensland and New South Wales, which cumulatively produce 86 percent of Australia’s coal, were already under threat due to depressed demand. With the added pressure of China’s restrictions, revenues have tumbled even further.

But not everywhere in Australia has lost out. This month, officials in the state of Western Australia – where 98 percent of Australia’s iron ore is mined – announced a A$10.7 billion ($8.4 billion) windfall in royalties for the state government, predominantly driven by a rise in Chinese demand for iron ore. As a result, Australia’s minerals trade has been divided almost clean in half. Coal, predominantly mined in Australia’s eastern states has suffered due to Chinese restrictions; meanwhile iron, mined in the west, has boomed due to the same country’s demand.

Western Australia – home to only 2.7 million people – produced 37 percent of the world’s iron ore in 2019, mined mainly in the state’s northwestern Pilbara region. In the same year, the iron ore industry accounted for 20 percent of the state’s gross state product, and 53 percent of the value of Western Australia’s merchandise exports.

China imports roughly two-thirds of its iron ore from the state, more than three times its second importer, Brazil. Iron ore underpins the state’s large trade surplus with China which, according to government statistics, reached A$92.6 billion in the 2019-2020 financial year.

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With the onset of the pandemic, concern spread that the state’s trade in iron ore would be severely impacted. However, Philip Kirchlechner, director at Iron Ore Research, a mining consultancy, said, “The expected fall from China never happened.”

While some cities in China experienced power shortages, a product of its stubborn resistance to imports of Australian coal, China’s demand for iron ore rose by 7 percent, to over 1.4 billion tonnes. This rise in demand spurred another year of over 1 billion tonnes of Chinese steel production, and was enough to offset a fall in demand from Japan, South Korea, and Taiwan, which decreased at an average of 13 percent across the three countries.

That rise in demand meant that, despite geopolitical tensions with China, the three largest exporters of iron ore from Western Australia – Rio Tinto, BHP, and Fortescue – all recorded positive results for 2020.

Citing “buoyant demand” from China, Rio Tinto, the largest iron exporter in the state, saw gross sales in 2020 rise 14 percent on the previous year to $27.5 billion. According to half-year results to December 31, 2020, BHP saw profit from operations of $9.8 billion, up 17 percent on the previous year, driven by “higher iron ore and copper prices.”

Fortescue, the state’s third-largest exporter of iron ore, also saw record shipments – 90.7 million tonnes – in the half year to December 31, 2020. Fortescue’s CEO, Elizabeth Gaines, told The Diplomat that “Fortescue’s success, and that of the Australian economy, has been built on the great powerhouse that is China.”

“Throughout the disruption as a result of the COVID-19 pandemic, Fortescue has remained a reliable and secure supplier of iron ore to support the strong, ongoing demand from our Chinese customers,” she added.

Despite this rosy picture, the reciprocal nature of China’s dependency on Western Australia for iron ore has long been a source of disquiet within the state’s government and business community. During the 2019-2020 financial year, 82 percent of Western Australia’s iron ore was exported to China, at a value of A$83.7 billion. The next largest export destination was Japan, which took just 7 percent.

Simmering tensions between Australia and China have only exacerbated concerns China could seek its iron elsewhere. State government officials could not immediately respond to a request for comment, as parliament is currently dissolved ahead of state elections in mid-March. However, in comments made to the Australian Broadcasting Corporation in December, Mark McGowan, the state premier, said that he was “concerned” the state’s iron ore could become the next target of Chinese tariffs.

The potential choke point has not escaped the attention of the state’s resource companies. Geopolitical uncertainties were a central facet of Rio Tinto’s recently published annual report, which affirmed that, “balancing the relationships we have with our host country government… alongside those we have with China as a key customer and supplier, market, technology partner and shareholder, is one of our top strategic priorities.”

“We monitor these trends closely, and in particular the evolution of the relationship between Australia and China.”

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Australian iron exports to China are chiefly used for steel production, which, as Philip Kirchlechner of Iron Ore Research explained, “enabled China to build its infrastructure at a low cost.” Yet in the next week China is set to outline its 14th Five-Year Plan, a central component of which is expected to be a push to shift China from being an infrastructure-led economy to one driven by consumer demand.

Despite this anticipated shift, Kirchlechner warns against concluding this will necessarily lead to a fall in China’s demand for iron ore. “Even though this should be the year of the consumer, they [China] will continue to need steel: the question is how much,” he said.

At this level of mutual dependency, it seems unlikely either side would pursue measures that could jeopardize the current trading relationship. Still, Reuters reported last November that China’s Baowu Group, the country’s largest steel producer, had plans to invest in an iron ore mine in Guinea. Australia finds itself in a less flexible position. China is by far the world’s largest importer of iron ore, a scenario that would remain unchanged by a small fall in demand.

The incoming Western Australian government has the more pleasant problem of deciding what to do with the windfall cash. And while the broader problem hums in the background, examples from the badly-hit coal industries in eastern states, which have already begun to re-align trade flows, may be a source of reassurance.

But that may be some time off. For now, Kirchlechner reiterated, “The reality is both sides need each other.”

James Chater is a freelance journalist currently based in Perth, Western Australia. His writing has been featured in The Guardian, The Spectator, New Statesman, The Wire China and Los Angeles Review of Books: China Channel.