China rattles its sabre, but still needs Aussie ore

Despite simmering tensions between the two nations, China’s insatiable appetite for iron ore is aiding Australia’s economic recovery and that demand is expected to sustain momentum into the next year.

While China has blocked Australian lobster, beef, timber and more recently wines in their latest trade spat, its iron ore demand is keeping the island nation’s economy humming.

Iron ore led Australia’s export growth of 5.4 per cent in October, when the world’s largest supplier of iron ore notched up its 34th consecutive monthly trade surplus, latest official data shows. Australia’s iron ore exports are up more than 40 per cent from a year ago, with the increase led by China, its biggest buyer of the key steelmaking ingredient.

Also read: Australia seeks clarity from Beijing on coal import ban

“Fears that Australia’s iron ore production will get embroiled in a trade war with China are overstated,” said Mathieu Savary, a strategist at Canada-based Bank Credit Analyst.

Australia exports more than half the world’s iron ore. Even if China were forced to make purchases from non-Australian producers, it would still be short about 30 per cent of the volumes it needs, Savary noted.

“China will not inflict upon itself such a wound that would hurt its own economic recovery,” he added.

“Thus, restrictions on Aussie iron ore imports will only be China’s last response to Australia, and the AUD will remain a beneficiary of the global economic recovery.”

The Australian dollar is hovering near 2018 highs, above 74 US cents, having jumped 5.5 per cent since the start of November led by stronger-than-expected economic data.

Figures this week showed Australia’s A$2-trillion economy expanded by a bigger-than-expected 3.3 per cent in the September quarter, following a 7 per cent contraction in June, as domestic consumption soared.

The rally in the Aussie dollar has come despite a cut to the official cash rate to a record low of 0.1 per cent and an expansion of its bond-buying programme by the Reserve Bank of Australia (RBA) in November.

And more gains are in the offing.

Morgan Stanley expects iron ore prices to jump after Brazil’s Vale trimmed its 2020 output guidance and released a 2021 forecast below expectations.

“This could sustain iron ore prices substantially above our 1H21 forecast of $88 per tonne,” London-based analyst Marius van Straaten wrote in a note.

Also read: Australia eyes trade with India as China spat exposes dependence

Iron ore futures have gained more than 80 per cent this year, fuelled by robust Chinese demand and supply concerns.

Industry experts say the strong run for iron ore will continue in a boon for Australian government which is likely to upgrade key economic projections and its budget outlook later this month.

($1 = 1.3444 Australian dollars)