If China really has told its steel mills to stop buying BHP’s iron ore, this isn’t just another twitch in a volatile commodities cycle. It goes to the heart of Australia’s ongoing prosperity, and to the government’s credibility in managing a testy relationship it claims to have smoothed over.
There are reports that the China Mineral Resources Group have instructed mills to pause iron ore purchases from BHP during hardball price negotiations.
Albo says that he’s concerned and wants it resolved quickly, which is all good and well but hoping for a resolution is no substitute for a strategy.
Iron ore is one of the few exports China avoided weaponising during the last trade war during Scott Morrison’s prime ministership, but it’s now being dragged into the equation.
At this stage the facts remain contested. Bloomberg reports lit the fuse on this but industry sources are trying to put it out, claiming no order has been issued at this time.
However, the PM and Treasurer are taking the reports seriously enough to comment on it publicly, and to arrange a meeting with BHP’s top boss.
The markets have certainly noticed what’s transpiring. BHP shares have fallen, albeit modestly to date. But it’s a sign that investors are worried.
There is a temptation to see this as economic coercion by other means, which may turn out to be the case. But the more likely explanation is that China is demonstrating its growing buyer power.
Albanese has taken pride in repairing the relationship with China since the enmity that existed under the Morrison government, but Beijing is still playing hardball on trade deals.
Iron ore is Australia’s biggest export and a reduction in demand from China would be a hammer blow to the economy, threatening to destroy the budgetary balance
CMRG was set up three years ago precisely to squeeze price concessions from the big miners, and now we’re seeing it happen in real time. That doesn’t make it benign, or any less of a threat to our national prosperity, but it was predictable: flex now during annual contract talks, to secure a discount that can be celebrated domestically as clever statecraft.
If it all stops there, great. However if it doesn’t, as is more likely, and more cases just like this arise, then we are about to get a battering from our biggest trading partner, and there are only downsides to what comes next.
Sky high commodity prices that have helped fund our government’s over-spending will end, leaving the budget in a perilous state. Australia might cease being the lucky country.
Even more concerning for BHP is what happens next if a short-term ban becomes a permanent impasse. China can source its iron ore from alternative providers like Rio Tinto, Fortescue and Brazil’s Vale. Beijing’s leverage isn’t unlimited, but the damage would be done relatively quickly.
Iron ore is Australia’s most valuable export, and the budget remains hostage to its price and volumes. Treasury’s outlook already predicts earnings slipping as global supply rises and prices dip. Finding out that your largest customer now wants ruthless price negotiations adds to growing concerns that the boom years are behind us.
Labor should be stress testing its budget against a China shock such as this, but that isn’t happening. On the contrary we are already spending beyond our means during the good times. What happens when that changes? It’s a potentially bleak outlook.
Reports of China’s temporary ban on deals with BHP have been enough to prompt a sell-off of shares, and the impact on the broader Australian economy are hard to overstate.
BHP and the government are right to keep their rhetoric in check for now. BHP won’t comment during the negotiation, and the government is remaining outwardly calm. But staying calm isn’t a plan.
Australia can’t outmuscle China on market share, but it can make it clear that tying core commodities to political mood shifts invites counter measures, including diverting supply to India and Southeast Asian states.
We have allowed the federal budget, WA’s state finances and large slabs of our superannuation system to ride the iron-ore cycle with gay abandon. Without it, neither of Jim Chalmers’ first two budgets would have been in surplus.
When Labor touted stability in Chinese relations after the 2022 reset, it wasn’t supposed to look like this. The real test is when potential shocks like this one arrive, is our economy diversified enough to manage the situation? On that metric we’re still talking a better game than we’re playing.
For now, the boring explanation seems the most likely. This is just leverage being used in a contract stoush all dressed up as a potential ban. But if a pattern of using such tactics does start to emerge, it will do significant damage to Australia’s fiscal state.