China’s demand for Australian iron ore is the gift that keeps on giving. It launched in the second half of 2005 and has since helped inject a staggering $1.2 trillion into the Australian economy.
After 18 years, the long boom in iron ore prices still generates about $32 billion in export revenue every three months, according to the Industry Ministry.
As governments in the United States and Europe struggle to stop Chinese competition from undermining their manufacturing industries, Australia is experiencing a seemingly endless bonanza. It is a difference that will shape our foreign policy toward China.
Iron ore prices hit their highest level since March last week, surpassing $130 a tonne. Some analysts expect a further rise as the Chinese government tries to boost growth through stimulus measures.
Australian miners’ cash costs were about $20 per tonne, so the profits, federal companies’ tax revenues and government royalties were enormous. The super profits are effectively a wealth transfer from China to Australia.
Department of Industry data on the volume and value of Australia’s iron ore exports shows the average realized price rose to over $50 a tonne in the September quarter of 2005, more than double the long-term average. Since then, the price has never fallen below $50 for over a quarter.
For nearly two decades, the average price was $102 per ton, rising to an average of $155 in the last three years. Actual spot prices (in US dollars) in traded markets are much more volatile, but quarterly receipts provide a comparison with costs and guidance for tax payments.
The Australian Taxation Office’s latest transparency report, released earlier this month, shows the resources sector generated half of all business tax revenue in 2020-21. In 2017-18, the resources sector paid $16 billion in corporate tax revenue. Four years later, the resources sector’s corporate tax payments had increased threefold to $42 billion.
Western Australia’s iron ore royalties have earned an average of $10 billion a year over the past three years and pumped $66 billion into the state over the past decade, state budget documents show.
Since 2005, Australia’s total income from iron ore exports has risen from $8 billion a year to $124 billion, while the amount shipped has increased from 230 million tonnes to just under 900 million tonnes.
China and Australia are interdependent when it comes to iron ore. China accounts for 85% of Australia’s iron ore exports and Australia accounts for 61% of China’s iron ore imports. Australia’s iron ore exports to China are three times larger than those from second-placed Brazil. The Chinese price for Australian iron ore determines the global market.
Iron ore was notably excluded from the Chinese government’s three-year economic coercion campaign against Australia because the Chinese steel industry cannot do without it.
China doesn’t like being so tied to Australia and leaving super profits to iron ore majors BHP, Rio Tinto, Fortescue and Hancock Mining. But since BHP and Rio Tinto effectively forced Chinese steel mills in 2010 to abandon annual contract price negotiations over which the Chinese state unsuccessfully tried to exert some control, the mills have been forced to pay the price set by the market.
The market price remains high, largely because China’s steel industry depends on its own domestic iron ore mines for about 20% of its supplies. They are high-cost operations and require high prices to keep them in business. In a competitive commodity market, prices for all are set by the highest cost marginal producer.
China’s central economic body, the National Development and Reform Commission, has blamed “speculation” and “hoarding” of iron ore supplies for the recent price rise and promised stricter monitoring of futures markets, although such measures are unlikely to have a greater impact now than in the past.
Beijing’s efforts to reduce dependence on Australia include supporting the expansion of domestic iron ore mining, increasing the use of scrap steel and investing in Africa. These efforts have been in place for a decade, during which Australia’s dependence on Australia has actually increased.
The Simondou Project in Ghana is the most significant new iron ore development in the world. It faces daunting technical, logistical and political challenges, but the project is moving forward. For political reasons, the railway line through central Ghana must be opened to general rail traffic. Transporting more than 1 million tonnes of iron ore per week over a railway line used for passengers and general cargo will be a logistical nightmare.
There will be more supply outside Australia in the coming years, but a significant decline in iron ore prices is more likely to be due to weaker demand from China. Many expected the downturn in the housing sector, which historically accounted for about 40% of China’s steel consumption, to put an end to miners’ super-profits. However, growth in industrial and infrastructure activity was enough to offset weakness in housing, even without the massive stimulus programs that combated previous downturns.
China-run iron ore markets are contributing to unexpected federal budget surpluses in Australia. The Australian Treasury has predicted in each of its last ten budgets that iron ore prices would fall back to $55 or (in the latest budget) $60 from market prices, which are usually well above $100 a tonne. Every $10 in iron ore prices that the Treasury gets wrong results in a A$500 million error in its annual budget balance.
The Treasury will ultimately be right, but in the meantime Australian living standards will continue to be supported by China’s need for our iron ore.
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