by Michael Grogan, First Class Analytics
With an economic slowdown in China and a fall in commodity prices, Australian iron ore exports have been hit hard. With the commodity being Australia’s largest export and accounting for over 74 billion AUD in the years 2013-14, Chinese iron ore import prices (in $ per tonne) have fallen from approximately $120 during this period to just under a current price of $60.
While iron ore has traditionally been in high demand by China as the construction industry continued to boom during the first half of this decade, demand has faltered as construction activity has slowly been declining in China. In this context, even falling prices across the Australian iron ore industry do not seem to be enough to boost demand. While China is officially the largest producer of iron ore worldwide, over two-thirds of China’s iron ore supplies have traditionally been imported from more developed markets such as Australia owing to concerns of poorer domestic quality.
However, the Chinese government do not seem content to allow foreign competition to continue to erode the competitiveness of domestic supplies. There may even be a case for saying that temporary decline in demand for Australian supplies presents an ample opportunity to make greater use of domestic stockpiles. With China announcing a broad series of tax reliefs for domestic iron ore miners (a 6 yuan tax cut for every tonne of iron ore produced), this may threaten the dominant position of major Australian exports such as BHP Billiton and Rio Tinto across this market. Indeed, it is only such larger companies that have sufficient economies of scale to remain profitable at such low prices.
Going forward, increased production across the Chinese market could mean that domestic mining companies are able to increase economies of scale sufficiently so as to supply the market at lower prices than Australian producers. In this scenario, there is the risk of an ongoing price war across the industry. However, could India prove to be Australia’s white knight? While demand for iron ore has been slowing in China, that of India has been increasing sharply, with demand for the period of April-October 2014 reaching a record 5 million tonnes. Unlike China, India does not benefit from vast supplies of iron ore with mining restrictions further constricting supply. While the drop in demand from China is a significant blow to Australia’s mining industry, a pickup in Indian demand may provide a boost to the industry – it is estimated that India will import almost 15 million tonnes of the commodity this year. Additionally, while tax relief may allow Chinese miners to continue production at lower cost, the more likely scenario is that such supplies will be used for domestic consumption purposes and Australia will ultimately remain the major exporter of iron ore for India.
Ultimately, the structure of Australia’s iron ore export market is changing, and exporters cannot simply wait for a pickup in demand from China. However, should we see continued growth in demand from the Indian market, then it may be possible that we will see higher iron ore prices towards the end of this year.
- Financial Times: Australia steeled for China slowdown as iron ore prices fall
- Hellenic Shipping News: India to import nearly 15 million tonnes of iron ore in 2015 as high local prices prompt steel makers to look overseas
- Reuters: As China demand slows, Indian iron ore imports surge to record
- South China Morning Post: China’s Iron Ore Tax Cut Puts Heat on Australian Miners