Don’t mention iron ore – China and Australia dance around the big issue

After a brief easing of tensions between the nations, political temperatures returned to boiling point recently as a Chinese foreign ministry spokesman tweeted a fake image of an Australian soldier threatening an Afghan child with a knife.

Australian Prime Minister Scott Morrison reacted with outrage, demanding China apologize, a turnaround from a speech he delivered on Nov. 23 in which he praised Beijing for lifting millions of its citizens out of poverty.

Australians across the political spectrum have been stunned in recent weeks by an official report that accused some members of its special forces unit of unlawfully killing Afghan civilians while deployed during the long-running conflict.

China’s tasteless condemnation of the exposure of alleged war crimes drew predictable comebacks from commentators in Australia, pointing out Beijing’s own human rights violations against the Uighur minority in the country’s northwest, as well as the irony of a Chinese official using Twitter, a platform banned by the country’s communist rulers.

While the tit-for-tat cheap shots may be amusing and fuel the outrage in some sections of the media, it does little to address the underlying tensions between the two countries, which have a symbiotic trade relationship.

China is the world’s largest importer of commodities, while Australia is the top exporter of iron ore, liquefied natural gas (LNG), gold (on a net basis), and is the No.2 shipper of coal.

But ties have been strained since Morrison called for an international investigation into the origins and response by Beijing to the outbreak of the novel coronavirus that first emerged late last year in the city of Wuhan, before spreading across the world.

China has slapped tariffs on Australian barley and wine, banned some meat imports and has delayed customs clearances for coal shipments, ostensibly on environmental grounds.

All these actions have one factor in common, they have targeted commodities and products that China can relatively easily get from other suppliers, but can cause significant pain to the Australian producers as China is a major buyer.

However, it’s not all plain sailing for Beijing.

Delays in coal shipments are starting to hurt profits at Chinese steel makers, given the sharp rise in the price of non-Australian coking coal, the fuel used to power the furnaces that turn iron ore into the metal.

A slide in Australian coking coal prices on the other hand is giving an advantage to regional steelmaking competitors, such as Japan, South Korea and India, who are now enjoying lower input costs.

Iron ore risks

But the one commodity that has been unaffected by the spat is iron ore, perhaps because it is the most important to both countries.

China buys about 70% of the world’s seaborne iron ore, about two-thirds of that from Australia, meaning China’s vast steel industry, the engine room of its infrastructure and construction focused economy, is highly reliant on Australian ore.

Australia’s iron ore exports were worth A$102 billion ($75 billion) in the 2019-20 fiscal year, about 40% of the total value of all its commodity exports, official data shows.

The ongoing tensions haven’t had any discernable impact on the iron ore trade, with Refinitiv data showing that China’s imports from Australia in November are likely to be around 66 million tonnes, much the same level as in October, extending a run of imports above 60 million tonnes that goes back to March.

With volumes holding up, it’s worth noting that the sharp rise in prices means Australia is earning record amounts from its iron ore exports.

The price of benchmark 62% iron ore for delivery to north China, assessed by commodity price reporting agency Argus, rose to a seven-year high of $132.50 a tonne on Monday.

It has now surged 66% since this year’s low of $79.60 a tonne hit on March 23, when much of China’s economy was in lockdown as part of efforts to contain the spread of the novel coronavirus.

Both Beijing and Canberra would be unwilling to touch the iron ore trade, but the question should be how high is the risk of a miscalculation by China, leading to what would be a domestically popular retaliation by Australia of cutting iron ore exports, perhaps by turning the Chinese tactic of customs inspections against them.

The provocative, but ultimately immature tweet probably doesn’t reach the level where iron ore comes into play, but it almost certainly will harden the Australian public’s increasingly negative view of the Chinese government.

What it will take is for China to realise that its bully boy tactics won’t work on Australia, and for Canberra to work out ways of dealing with an authoritarian regime, without seeming to kowtow to Beijing, but still be obsequious enough to smooth ruffled feathers.

(Editing by Himani Sarkar)