Hello from Hong Kong, which last week reported its first case of coronavirus since August and still requires three weeks of quarantine for anyone arriving from most places on earth.
Our main piece today is about China’s relationship with another country that ranks highly on the quarantine spectrum: Australia. The spat has hit sales of several key Australian goods to China. But, up until now, Australian businesses have still been able to sell Chinese companies their iron ore. We examine whether that’s set to remain the case.
When surviving trade tensions isn’t enough
When former Australian prime minister Tony Abbott criticised China’s pressure on Taiwan in recent days, the country’s embassy in Canberra quickly hit back. Abbott was a “pitiful” politician, and his comments in Taiwan exposed his “hideous anti-China features”.
The exchange was the latest salvo in a marked deterioration in geopolitical relations between Australia and China over the past 18 months, with the launch of a nuclear submarine defence initiative last month compounding existing tension over the origins of the coronavirus pandemic.
Trade in various Australian commodities — including coal, wine and beef — has become entangled in the dispute. But when it comes to the biggest single item in the trade relationship between the two countries, the story is very different.
Iron ore exported to China hit a record high in value terms in August (though not by volume), after a period in which its price had risen and fallen sharply. That’s positive for Australia, which is the biggest player in this market. This “despite the tension” trade marks a continuation of a theme that dominated last year, when China churned out record volumes of steel as it launched an industry-driven recovery from the initial impact of the pandemic. By the end of June 2020, Australia was reporting a record trade surplus.
Now, the pressures surrounding iron ore are shifting. Futures on the Dalian exchange for delivery of iron ore in January 2022 are trading at Rmb777 a tonne compared with about Rmb1,221 in May.
Again this is for reasons that extend beyond geopolitics to incorporate deep structural shifts. Iron ore is a crucial ingredient in China’s steel production, which in August hit its lowest level in 17 months.
A crisis at heavily indebted developer Evergrande and a broader real estate slowdown has prompted a debate over the future of Chinese real estate and its relationship with demand for the metal. Robert Rennie, head of market strategy at Westpac, estimates a third of the metal in China goes towards property construction, and says we may “see a more dramatic slowdown in steel production than the market is really thinking”.
China’s urban transformation, which led to almost a third of its population moving from the countryside to cities between 1996 and 2019, is arguably the most dramatic in history, depending on precisely how such processes are measured.
That shift prompted superlatives in Australia too. The Australia Strategic Policy Institute, a think-tank, says that over the past 15 years mining companies in the country have mounted “the greatest earthmoving operation the world has ever seen” in order to allow its iron ore mines to keep pace with Chinese demand for steel.
In a report specifically on iron ore, published last month, it noted that previous forecasts of slowing steel production in 2015, during an earlier Chinese property slowdown, were mistaken. It also argued that while China is attempting to move away from reliance on Australia and towards sources of steel production it can control, including domestic sources and scrap steel, the country has been “trying and failing to curb its steel production for the past five years”.
The motivations behind that are deeply embedded in yet another world-changing shift — China’s green transition. Steel production is highly carbon intensive, and early this year top officials publicly sought to contain production. In the short-term, higher prices from shortages can complicate pressure from the central government. But the approaching Beijing Winter Olympics in February may add immediate incentives to a long-term shift from Beijing, which one year ago declared its ambitions for carbon neutrality by 2060.
While the fate of China’s property sector is crucial for Australia’s trade in iron ore in the medium-term, the longer-term forecast would require a careful calibration of environmental as well as housing needs. As with a multi-decade urbanisation process of which many failed to spot the significance, the question is precisely what commodities will benefit from the green transition, and which countries or companies produce them.
Trade links
Nikkei ($, subscription required) takes a look at the production, politics and propaganda driving Beijing’s Covid-19 vaccine diplomacy. Japan’s wooing of TSMC, the world’s largest chipmaker, has paid off ($) with a $7bn semiconductor plant in western Kumamoto prefecture.
David Sheppard explains why Europe is struggling to get hold of adequate supplies of natural gas. China’s factories, meanwhile, are resorting to diesel generators to stem power crunches of their own.
Following on from her excellent special report in this week’s Economist, Soumaya Keynes has put together a podcast featuring interviews with the head of the World Trade Organization among others, explaining why there’s a new logic for trade.
Source: Economy - ft.com
