Worried that China might soon stop buying Australian iron ore? Experts reckon the Asian giant couldn't kick the habit by 2030 if it tried.
A seven-year high in iron ore prices has lifted the fog of Australia's escalating diplomatic and trade war with China.
Having made easy hits by shunning Australian supply of commodities it can buy elsewhere, China's campaign of trade pressure faces its biggest test in the red dirt of Western Australia's Pilbara region.
The stakes could not be higher for both nations: iron ore is easily Australia's most lucrative export commodity at a time of record government debt, while the steel that China makes from it is essential for the socially stabilising force of urbanisation and its ''One Belt, One Road'' foreign policy strategy.
Fresh signs this week that Brazilian miner Vale will take longer than expected to solve the challenges curbing its iron ore output will extend the boom conditions for Australian miners, and it reinforced the simple arithmetic behind China's iron ore predicament.
So long as China wants to continue making about 55 per cent of the world's steel, it will need to continue buying about 68 per cent of the world's seaborne iron ore.
So long as it needs that much from abroad – and its domestic iron ore industry is expected to shrink in the decade ahead – China cannot ignore the nation that supplies 60 per cent of that exported ore.
This dependency on foreign raw materials is what Australia's former ambassador to China, Geoff Raby, has described in his new book, China's Grand Strategy and Australia's Future in the New Global Order, as a "nightmare" for China's strategic and defence planners.
China's options for curing its hopeless dependence on this country's iron ore are limited.
For more than a decade, Guinea's Simandou mountains have been nominated as the future iron ore province that would allow China to reduce its reliance on Australian suppliers.
The province remains untapped to this day, and the multinational consortium leading the latest attempt to develop a 650-kilometre infrastructure network through a nation plagued by poverty, corruption and pandemic, hopes to be producing 80 million tonnes of iron ore per year by about 2027.
If that ambitious, $US14 billion plan were executed, it would put into the market less than 10 per cent of the iron ore volumes that left Australian shores in the year to June 30. Simandou would help China, but it is filler, not Pilbara killer.
Australia's true competitor in iron ore, Vale, hopes to bring about 100 million tonnes of extra ore back into the market by about 2023. That would certainly bring iron ore prices down from their current highs, but those tonnes were always expected to be in the market. Their absence, caused by a deadly dam disaster in January 2019, has handed Australian miners the most unfortunate of fortunes.
One bearish scenario workshopped in Canberra recently was the notion that China might try to strong-arm iron ore prices lower by reverting to the sort of single, collective buying office that was more common in decades gone by.
There is no evidence to suggest China has any such plans, and in an era when Chinese mills compete fiercely with each other, have their own procurement teams, binding supply contracts and in some cases, ownership of Australian mines, it is hard to see how such a lever could be pulled smoothly.
''I couldn't imagine it,'' says Raby, when asked about the risk of China reverting to a single iron ore buying office. ''Although lots of things happen that I couldn't have imagined.''
Those who have sat through recent conferences involving the entity that theoretically could lead such a move, the China Iron and Steel Association, say there has been no mention of the concept. Under a scorched earth scenario, would China be prepared to reduce the amount of steel it produces each year to spite Australia?
Raby says the answer to that is "emphatically" no.
''Their big agenda is the Belt and Road,'' says Raby, of China's grand plan to provide the hard and soft infrastructure upon which trade between Europe and Asia will flow. ''Steel is central to it.''
While rival nations like Guinea are commonly discussed as threats to Australia's primacy in the iron ore sector, the fastest-growing competitor in the race to feed Chinese steel mills in the next decade will be scrap steel.
As nations move through the second and third waves of urbanisation, scrap's role as a feedstock for steel mills tends to grow.
Mills in Europe and the United States already get the majority of their iron from the steel that is scrapped when old cars reach the end of their working lives, or when railway lines are replaced and recycled.
CRU's senior iron ore analyst Andrew Gadd predicts the volume of scrap consumed by Chinese mills will rise by 76 per cent to 357 million tonnes over the next 10 years.
The rise of scrap will coincide with a gentle decline in steel production volumes in China after 2025, with Gadd predicting 2020 will prove to be the peak year for Chinese iron ore demand. Those coincident trends should ensure Chinese mills get 35 per cent of their feedstock from scrap by 2030; up from 18 per cent this year.
''This is a substantial shift in the sourcing of feedstocks for steel production,'' says Gadd.
The Chinese government does have some subtle levers it can pull to accelerate the rise of scrap; it has made noises in the past six months about excluding scrap ferrous materials (those containing iron) from its ban on the importation of waste from other nations.
China imported 13.7 million tonnes of ferrous scrap in 2009, before rising prices and environmental concerns reduced the trade.
The World Steel Association estimates China imported just 1.3 million tonnes of ferrous scrap in 2018 and that fell to 0.2 million tonnes when a ban was introduced in 2019.
S&P Global reported in October that China would likely exclude ferrous scrap from the import ban in early 2021, and could import as much as 20 million tonnes of scrap next year.
While that would be a record intake of scrap metal from abroad, it would only boost scrap consumption in Chinese mills by a maximum of 10 per cent above the levels seen in 2020. The immediate impact on iron ore demand in China would be negligible, and like any other market, if China dives heavily into the foreign scrap market, it will send prices soaring.
While China's total demand for iron ore will decline over the next decade, Gadd does not predict any significant decline in Australian export volumes.
Australia's market share may dip to 57 per cent in 2025 on the back of recovering supply in Brazil but he expects it to return to about 60 per cent by 2030.
''We expect more depletion and exit of some high-cost mines outside of Australia in the late 2020s,'' he says, noting China's own iron ore industry would likely shrink to supply about 14 per cent of mills' needs in 2030, down from 20 per cent today.
''Australia is very well positioned to sustain its production levels in a global seaborne iron ore market that remains very similar in size in 2030 compared to today.''
If the Chinese leadership set itself a goal of eliminating Australian iron ore from its supply chains by 2030, Gadd believes it would struggle to achieve it.
''Even if China could secure all the available non-Australian seaborne ore, including distant producers such as Sweden, Canada, Russia and Ukraine, it would still need to develop an additional 300 million tonnes of supply to meet its needs and completely replace Australia as an iron ore supplier by 2030,'' he says.
To put 300 million tonnes into context, BHP's Western Australian iron ore empire has never done better than 283.2 million tonnes in a single year; and BHP has been working at it for almost 54 years.
If any nation could build a new BHP inside a decade, surely it is China – the nation that has urbanised hundreds of millions of people inside a generation and can turn submerged reefs into militarised islands in the blink of an eye.
But even allowing for China's unique ability to make the impossible possible, Gadd finds it hard to see how it could manage to rid itself of Australian iron ore inside a decade. He finds it even harder to envisage how it could be done in a way that is financially rational.
''While there are large enough resources around the world to support new major mine developments, notably in West Africa, Brazil and the [Commonwealth of Independent States], these are not all accessible to Chinese investment or economically feasible,'' he says.
''A major build out of well over 300 million tonnes of new mine capacity is simply not executable by 2030 in our view, given the lead times required for obtaining the resources where they aren’t already held and proceeding through planning, approvals, construction and ramp-up at this scale, with risks of delays at all stages.''
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