Oct 14, 2020

Iron ore on strong course despite China storm

Iron ore on strong course despite China storm

China’s reliance on Australian iron ore will likely prevent the steelmaking commodity from being used as a lever in trade tensions between Australia and its biggest trading partner, according to local miners.

After the Morrison government called for an investigation into the origins of the coronavirus in April, China restricted imports of Australian beef and barley and ordered an anti-dumping investigation into Australian wine. 

News broke this week of China curbing Australian coal imports but it remains unclear whether the move is a tactical industry play or an escalation of the economic pressure it has deployed in recent months, raising fears Australia’s largest source of export revenue could be affected. 

Australia’s iron ore exports hit $103 billion in 2019-20, with robust prices driven by strong demand from China and supply constraints in other parts of the world. China is the world’s largest steel producer and accounts for around 80 per cent of Australia’s iron ore exports by volume.

On the sidelines of the Diggers and Dealers mining conference in Kalgoorlie, Australian iron ore miners said trade remained strong and constructive.

Fortescue Metals Group chief executive Elizabeth Gaines said the company was in regular dialogue with its customers and hadn’t received any murmurings of restrictions being placed on iron ore. 

“We haven’t had any feedback on that particular matter,” Ms Gaines said.

“That has happened in the past where there has been a ban or slow down on coal… I think that was a couple of years ago to protect the domestic industry. Obviously it [coal] is a very different dynamic, with a much stronger domestic coal industry in China, but no we haven’t had any feedback from our customers.”

However, Ms Gaines said the industry should not become complacent. 

“The contribution of the resource sector to the Australian economy is very significant and heightened even more during COVID so I am sure there is an appreciation of how important that relationship is,” she said.

Mount Gibson Iron chief executive Peter Kerr (below) said the West Australian producer had not “had any political issues come back to us in our marketing or sales aspects” and had experienced no export delays.

“China is the main game for the iron ore sector here and around the world,” Mr Kerr said, indicating about 97 per cent of his company’s cargoes went to Chinese ports. 

“The fundamentals of coal supply and iron ore supply are quite different in that in China there is a fair amount of coal available from other sources and so politically there (are) obviously things happening there. But with iron ore, China needs seaborne iron ore [because] the quantity of iron ore within China itself is not major.”

Tensions between Australia and China have been a hot topic at the conference, with West Australian Premier Mark McGowan raising the issue in his keynote address and the impact on investment levels being discussed around the marquee booths.

PCF Capital managing director Liam Twigger, one of the local industry’s highest-profile dealmakers, said his firm had previously fielded significant interest from Chinese companies looking to invest in Australian resources but changes made to the Foreign Investment Review Board’s (FIRB) threshold for examining bids had all but eliminated Chinese-driven action.

The dollar value threshold for foreign bids that require the scrutiny of FIRB was lowered to zero dollars in March, from as much as $1.2 billion previously.

Mr Twigger said the changes to the FIRB threshold were designed to protect Australian businesses from advantageous Chinese takeovers as the COVID-19 pandemic escalated. 

“The government was of the view COVID had changed everything, valuations were low and they appeared to want to stop Chinese companies buying things up really cheaply,” Mr Twigger said. “That hasn’t happened, valuations have held up and I think there are enough protections in the system that will balance it.”

“We have been very reliant on foreign investment and so to cut that off has been significant and it seems pretty targeted at China. We don’t have to kowtow but we need to repair that relationship.”