China’s demand for iron ore added $20 billion to Australia’s Federal Budget

Chinese demand for Australian iron ore will add up to $20 billion to Tuesday’s federal budget as importers stockpile the critical resource fearing further deterioration of the diplomatic relationship between the two nations – which is in turn sending prices to record heights.

The increase in tax revenue from Australia’s largest export, worth double what the government spends on childcare each year, follows a sharp decline in the Australia-China relationship. A year of tit-for-tat escalation over national security and human rights disputes culminated in the suspension of the China-Australia Strategic Economic Dialogue on Thursday.

Workers take a break at a stockyard in Shanghai. Demand for Australian iron ore has held up well despite tensions between the two countries.
Workers take a break at a stockyard in Shanghai. Demand for Australian iron ore has held up well despite tensions between the two countries. CREDIT:BLOOMBERG

China’s Foreign Ministry warned for weeks that China would retaliate over the Morrison government’s decision in April to cancel Victoria’s Belt and Road agreement. On Thursday night it said Australia had to take responsibility for its actions.

“It should stop the insane suppression targeting China-Australia cooperation, stop politicising and stigmatising normal exchange and stop going further down the wrong path,” said Foreign Ministry spokesman Wang Wenbin.


The iron ore price reached a record $US200 ($257) a tonne on Friday after a dizzying surge driven by Chinese demand and concerns over future supply. It remains the most significant Australian export untouched by trade sanctions as the Chinese economy gobbles up the resource. Iron ore is used to make steel, a key component of China’s construction stimulus-driven economic recovery.

China's Foreign Ministry spokesman Wang Wenbin.
China’s Foreign Ministry spokesman Wang Wenbin. CREDIT:AP

Australia supplies two-thirds of Cina’s iron ore intake but the windfall may be short-lived as Brazil’s iron ore exports start to come back on stream next year.

The chairman of Rio Tinto, the world’s biggest shipper of iron ore, said China’s options for supplies outside of Australia remain limited.

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“At the moment, there are relatively few alternatives available to China,” said Rio chairman Simon Thompson.

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Kaho Yu, a principal analyst at Verisk Maplecroft said deteriorating “relations will likely drive Beijing to diversify supply away from Australia, especially of resource commodities it sources primarily from the latter.”

But Wood Mackenzie senior economist Yanting Zhou said China was unlikely to ban imports of Australian commodities that they need as it will hurt the domestic economy.

“The government is more likely to raise the administrative cost for importing commodities from Australia if they want to take action,” she said.

Commonwealth Bank economist Vivek Dhar said the decision to suspend the China‑Australia Strategic Economic Dialogue has raised concerns that Australia’s iron ore could one day be affected by the dispute.

“We think this is an unlikely scenario, but these concerns will likely give iron ore prices support, especially if Australia‑China relations continue to deteriorate,” he said.


The federal budget conservatively assumes an iron ore price of $US55 a tonne. A $US10 lift in the price of iron ore results in a $2 billion increase in tax revenues according to Treasury estimates. That will give a $20 billion lift to the federal budget after the price sailed from $US100 to $US200 a tonne over the past year. There have been four record import shipments of this premium resource into China in the past 12 months when Australia-China relations have fallen to their lowest ebb.

April data from the General Administration of Customs released on Friday showed the biggest leap in iron ore imports in a decade. Chinese steel futures also rallied to a new record on Thursday, indicating demand will remain high for some time to come.

But the persistently high price of iron ore now poses its own political threat as one of China’s top regulators, the Financial Stability and Development Commission, looks for ways to stabilise the price and diversify imports. The China Iron and Steel Association, a state-backed industry body, has also repeatedly complained to top Australian miners BHP and Rio Tinto about rising prices.

James Laurenceson, the director of the Australia-China Relations Institute at the University of Technology, said China could put further pressure on Australia by disrupting imports such as dairy products or flows of students and tourists as borders reopen.

“Nor is the ‘nuclear option’ – killing the China–Australia Free Trade Agreement – off the table,” he said.

Laurenceson said it would be a mistake to discount the symbolism of China suspending the Strategic Economic Dialogue.

“Symbolism, after all, was what motivated the Australian government to tear up Victoria’s Belt and Road Initiative agreement with China,” he wrote in The Conversation on Friday.

”Beijing has now sent a message in return: Canberra shouldn’t expect to get off scot-free.”

CREDIT: Sydney Morning Herald 

Written by:

Eryk Bagshaw &
Nick Toscano


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