Of all the countries hitched for their own economic wellbeing to the commodities demands of China, perhaps none is more dependent than Australia. Anywhere from 33% to 36% of Australian exports are China-bound and these are almost exclusively commodities, most notably iron ore, but also everything from copper to coal. So, there’s great concern now in Australia that the recent softening in Chinese demand isn’t just a temporary blip and that Australian commodities are in for a rough time.
“It’s the coming six months or a year that I’m worried about,” said Tom Conley, a senior lecturer in political economy at Griffith University’s School of Government and International Relations, Brisbane. Conley has written extensively on economic links between Australia and China.
So far, Conley explains, the price of metals has fallen rapidly, although much less so than the volume of exports. The fear is that China’s need for iron ore at even the much lower price will lessen. “The question is whether China will keep demanding commodities at the level it has been,” he said. “I think the answer is ‘no.’”
Iron ore is the country’s biggest single export item. Already, the steep drop in iron ore prices has taken its toll on smaller Australian producers whose cost of production is much higher than the two giants of the industry: Rio Tinto and BHP Billiton. Fortesque Metals Group, the country’s third largest producer, has been forced in recent months to restructure its debt, pare production and cut jobs in an attempt to stay afloat. There are now talks of an investment from China itself.
In response to soaring Chinese demand for metals over the past decade, companies invested billions of dollars in new mines and infrastructure, including ports and rail. Australia significantly ramped its iron ore mining in particular. Iron ore exports have grown almost four-fold since 2000, and rocketed by almost half in just two years, 2012 to 2014.
Because of this massive production increase, the dollar value of earnings “stayed elevated,” Conley said, even as the price per ton began to fall from their 2011 highs. But those days are over. For Australia’s fiscal year ended June 30, 2015, the government estimated the value of iron ore exports fell 27% to A$54.3 billion, even as volume grew 13%, to 733 million tons.
Oversupply will only get worse in the months ahead. Australia’s richest woman, Gina Reinhart, and a consortium of Asian partners are pouring $10 billion into a mammoth new iron-ore mining complex called Roy Hill. Production could begin later this year, although the project has been bedeviled by delays and cost overruns. The timing of the new mine couldn’t be worse, according to those in the industry.
“There were just excessive expectations about iron ore,” Conley said. “People really started to believe the hype.”
China represents the third major economic pivot for modern Australia. Until World War II, Great Britain was Australia’s major trading partner. Demands for raw materials from Japan and, to a lesser extent, South Korea triggered an economic upsurge that began in the 1960s. As Japan flagged, China took over.
Now, there’s talk of the need to diversify markets once more. However, the decision-making is complicated by the fact that some 80% of minerals production is in the hands of non-Australian owners and investors and the Chinese, if anything, are looking to increase their holdings to insure supply.
The optimists in Australia hope that their country can benefit from China’s shift to a more consumption driven economy. They quip that as China’s middle class demands more and more protein and higher value foodstuffs, Australia will get a chance to get in on the action, shifting “from a mining boom to a dining boom.”
