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China-Australia relations
EconomyChina Economy

China-Australia relations: high iron ore prices may correct on slowing demand, but derivative trading could still keep prices up, analysts say

  • Chinese government-backed consultancy projects a slowdown in China’s steel production next year, resulting in declining demand for iron ore
  • A factor unrelated to the fundamental supply and demand of iron ore lies in the aggressive trading of iron ore futures

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China imported 1.04 billion tonnes of iron ore in 2019, with 660 million tonnes coming from Australia, mainly via Rio Tinto, BHP and Fortescue Metals Group. Photo: Reuters
Su-Lin Tan

High iron ore prices are due for a correction in the coming year as Chinese demand for the steelmaking ingredient is expected to ease, though aggressive speculation through iron ore derivative trading could thwart that outcome, according to analysts.

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After the China Iron and Steel Association (CISA) held talks last week with Australia’s Rio Tinto and BHP, two of the world’s biggest iron ore miners, over how to control iron ore prices, prices have increased to near their highest levels since 2011, sailing past the US$160 a tonne price point to hit US$171 on Monday after a dip to about US$153 a tonne last week.

In the short term, despite its trade conflict with China, Australia has seen a small “mining boom” impact on the economy as a result of the high iron ore prices.

Deloitte Access Economics, in an analysis of Australia’s budget outlook last week, said the conflict had delivered Australia a windfall, even though it has been losing out on trade in other goods, including lobsters, barley and coal – imports that China has suspended.

However, it warned that the trade conflict had also introduced fear into the market, raising worries that China could also clamp down on Australian iron ore imports, pushing up the market price.

The bottom line is that China’s trade war with Australia is making [Australia] money rather than losing it
Deloitte Access Economics

“Markets are still worried that China may do something. So they’ve responded by nervously bidding up [iron ore] prices in fear of exactly that,” the note said. “This ‘fear tax’ isn’t the only thing driving up prices – markets are also worried that heavy rain may constrict supply out of Brazil, while very low interest rates and a falling US dollar are pumping up pricing, too.”

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