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Iron ore price could drop to US $ 20 / tonne amid bitter China-Australia relationship

There are warnings that the price of iron ore could drop incredibly low, with calls for Australia to lead the “fight” against China via the world trade arbiter.

The price of iron ore could drop as much as $ 20 a tonne, “jeopardizing” Australia’s export status as a major source of income and exposing the country to “Chinese coercion,” according to a new report.

The Australian Strategic Policy Institute released a report exploring the future of iron ore exports to China after its “bonanza” year in which sales brought in more than $ 150 billion to the Australian economy.

But China is determined to break its dependence on Australian iron ore, the report notes.

Its latest five-year plan for its steel industry sets targets to increase the share of iron ore supplied by Chinese mines, both domestically and abroad, and to increase the amount of steel made from scrap.

The report referred to a scenario in which iron ore shifts from its current status of scarcity to a surplus as Chinese demand falls as part of its plan or due to an economic slowdown resulting from the collapse of China. one of its biggest real estate developers, China Evergrande.

“The ore surplus could be significant – several hundred million tonnes per year. Australian ore

remains the lowest cost, but the price drops to US $ 20-30 / tonne, compromising higher cost operations and potentially exposing Australian iron ore miners to Chinese coercion, ”the report said.

Australia should strike back

Report author David Uren said China has not been afraid to use coercion in the past when it comes to Australian exports, such as preventing coal shipments from landing on land.

“We have seen in other markets where they are just rejecting Australian shipments and trying to push costs back on the Australian economy,” he told news.com.au.

“With coal Australia has been able to find other markets, as well as cotton, but it would be difficult with iron ore because China is a big buyer of our iron ore.”

Uren urged Australia to take China to the world trade arbiter over its coal export ban to reduce the risk of iron ore being drawn into the bitter diplomatic dispute between the two countries .

Australia has already filed a complaint with the World Trade Organization (WTO) over China’s tariffs on barley and wine.

“While Australia must choose its fights, there are strong arguments for the government to file a coal complaint: this does not imply a formal tariff but constitutes pure discrimination against a single supplier country,” he said. he stated in the report.

“It is important to note that success at the WTO in a coal case could set a precedent for any similar discrimination against Australian iron ore.”

Uren added that a drop in the price of iron ore would have a direct impact on the Australian economy.

“This means the Commonwealth collects less corporate taxes, Western Australia collects less iron ore royalties, and Australia collects less export revenue overall, which has an impact on budgets, employment and macroeconomics in general, ”he said.

The collapse of the real estate developer

Another key issue in the iron ore markets is what’s going on with China Evergrande, Uren said.

“The financial implosion of Evergrande has similarities with the subprime crisis in the United States with the

accumulation of bad debts and real estate related losses with the potential to cause a loss of confidence in the financial system, ”he warned in the report.

China Evergrande has grown from a global titan to the world’s most indebted real estate developer, racking up a staggering A $ 432 billion debt.

Its shares fell more than 10% in trading in Hong Kong on Monday, and are down 72% in Hong Kong this year.

“It is possible that the failure of this group will lead to significant fallout in Chinese real estate markets, including real estate and real estate development, as these industries are one of the major users of steel in China,” a- he told news.com.au.

“So we saw the price of iron ore drop from over US $ 200 to under US $ 100 in just a few months. If the downturn in Evergrande property turns into a deeper downturn in the Chinese real estate market, we may well see a lot more pressure on iron ore prices and the market weakening a lot over the next 12 months.

Other scenarios

But if there was stable global and Chinese economic growth, the report predicts that prices could fall dramatically again, but without having such a severe impact on Australia.

“Prices [could] go down to US $ 50-70 / tonne, which would still be double the production costs for major Australian or Brazilian producers, ”he said.

“This is broadly the point of view of the Ministry of Industry and BHP.”

However, in a third scenario, the report pointed out that iron ore prices could rise to as much as US $ 300 per tonne if China fails to cut steel production, the Brazilian mining industry is on the sidelines. and Africa was at a standstill.

“The reason for representing three scenarios is that forecasters have always been wrong about the iron ore market,” Uren said.

“It is entirely possible that demand from China is once again on the wrong track for forecasters, as it has done so many times in the past. I don’t think the idea that the price of iron ore could reach new heights is out of the question. “

ASX recovery

Australia’s most valuable export saw its price collapse by more than 60 percent from a record high in May, when it hit nearly US $ 240 a tonne.

The collapse in prices that brought it down below the US $ 100 mark led to the deletion of AU $ 50 billion from the ASX on Monday.

But the Aussie dollar and stocks rebounded slightly after onshore real estate unit China Evergrande said it had negotiated a plan with bondholders to repay A $ 35.9 million in interest due Thursday.

But Evergrande’s ability to make an A $ 83.5 million payment on a March 2022 offshore bond, also due Thursday, remains unclear.

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