The future trade and foreign policy of Chinese iron ore imports

The global pandemic that has ravaged supply chains and economies around the world has given food for thought throughout many sectors, including resource management and dependency. This is especially the case in China, which, for its massive iron ore demands relies principally on Australia and Brazil. The Chinese iron ore trade is the driver of the dry bulk market for the larger vessel ranges and so any shift in demand patterns has the potential to cause considerable disruption in the shipping markets. In the wake of the first wave of the corona crisis, there is growing talk in China about the future of its iron ore supplies and whether the country and the industry can wean itself away from such a high level of dependency on one or two sources. In the longer term, such shifts, and the required policy and investment action could lead to a shakeup of the dominant dry bulk trade.

The coronavirus outbreak has highlighted some of the weaknesses within the iron ore supply chain, especially for Chinese importers. If either one or both of the main producing countries, namely Australia and Brazil, see some type of supply chain disruption, it ripples throughout the entire market. As such, Chinese mining interests and manufacturing interests are pushing for a reduction in the reliance on these external sources. While China is not endowed with large reserves of the key steel making ingredient, said interests are pushing for a diversification in the supply sources, with Chinese business entities keen to take a stake in the mining and processing of what is a key strategic resource.

The main area of focus is said to be Sub-Saharan Africa, where iron ore deposits remain largely unexplored or have yet to be developed. It has been reported that the Belt & Road Initiative could be one of the avenues for this expansion of Chinese overseas interests in key iron ore producing countries, similar to the way Chinese companies control much of the cobalt supply chain through countries including the Democratic Republic of the Congo. In the coming years, the Simandou project in Guinea will come online which could help reduce the reliance on the traditional sources, but it will not end China’s dependence. New sources must be found and developed in what, in the long term, could mark a considerable shift in the structure of the seaborne iron ore market.

Furthermore, the simmering geopolitical tensions between China and Australia are a reminder that, as China takes on a more prominent role in global affairs, its trade partners may take exception to some aspects of Chinese foreign policy, especially if said trade partners are closely aligned in political and economic ideology to the West and the US, rather than China. The diplomatic and now trade based dispute between Australia and China over the source of the COVID-19 outbreak provides a very good example. Australia has been pressing for an independent investigation into the source of the outbreak and has implied that questions exist over China’s handling of the initial cases and China has not responded well. While no severe action has been taken by either side, the size of the trade flows between the countries makes the potential for punitive action a massive concern for shippers, exporters and carriers. Through May, leading Government officials have stated the importance of the trading relationship but also mentioned ‘economic coercion’ as a policy response tool if Australia does not soften its tone. At the current time, this remains a relatively minor war of words with some measures, perhaps warning shots, being taken by both sides.

While much of the focus is on China and its future policy direction on strategic resources, it is important to remember the impact of shifting market dynamics on the supply regions. Given its importance to the wider economy, the minerals industry in Australia is seen to be central to the recovery from the fallout from the coronavirus in the coming years, similar to the way it has been central to Australian economic growth in past decades.

Through the first half of the year, the resilience in prices, especially for iron ore, have provided some bright spots for mining companies, allowing them to develop investment plans for the coming years. Beyond boosting the revenues and balance sheets of the operators, the strength in earnings through a tough time has also boosted various investment and pension funds in Australia, further cementing the industry’s position as central to the Australian economy. As a result, mining infrastructure and capital expenditures are set to expand in the second half of 2020, with a number of major operators including BHP, FMG and Rio Tinto all announcing large scale investment plans of between USD 2-4bn.

With the importance of the trade clear to see for both sides, not forgetting other major exporters including Brazil and South Africa, the growing talk of the Chinese desire to shift the focus of its trade policy for iron ore will raise concern. Furthermore, Chinese resource policy overseas can also cause friction politically. There have been grave concerns raised about the means by which China takes control of key strategic infrastructure around the world, such as the handover of the strategic port of Hambantota in Sri Lanka, and the exploitation of key resources in developing countries. The coming years could generate a great deal of uncertainty for the dry bulk trade and carriers may have to adapt to a more fractious, geographically diverse market situation.
Source: Dynamar

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