Chief correspondent Jason Jiang digs into the souring of relations between China and Australia to ask what this could mean for iron ore trade flows.
Splash’s report two weeks ago on China’s decision to construct a raft of new very large ore carrier (VLOC) terminals – interpreted by some analysts as part of a bigger geopolitical play to cut the nation’s reliance on Australia for its iron ore imports amid a severe souring of diplomatic ties – has been read by nearly 80,000 readers, sparking considerable debate on the future of this vital dry bulk channel of business.
Beijing’s National Development and Reform Commission (NDRC) last month gave the green light for four new VLOC terminals to be built in Rizhao, Yantai and Lanshan in Shandong province, and Sanduao in Fujian province to go alongside the existing seven VLOC terminals.
“Commentary on the move has speculated that Beijing is seeking to ensure greater ‘iron ore security’ for the future, not only by opening itself to a wider range of of markets, including Brazil, but also to countries where there is less chance of political disagreement,” Alphabulk pointed out in a weekly report.
Not all analysts agree however – the fact is the two nations need each other for the time being.
Australia, which exports 90% of its iron ore to China, has been a vocal opponent of China’s telecoms company Huawei, and also recently joined the US in opposing China’s maritime claims in the South China Sea. It was also the first country to come out and call for an international enquiry into China’s handling of Covid-19. China has responded by restricting imports of Australian coal and barley recently, but there’s no sign Beijing is about to switch the taps off for Australian iron ore.
Despite all the political sabre rattling, China has increased its iron ore imports from Australia this year, not because they want to but because there is no alternative
Data from IHS Markit shows Australia supplied more than 380m tonnes of iron ore to China in the first half of 2020, while Brazil, the second largest iron ore source for China, shipped less than 100m tonnes of iron ore to China over the same period.
Daejin Lee, lead shipping analyst at IHS Markit, reckons that there is no reliable alternative source in the world to replace Australian iron ore as even if Brazil exports its entire iron ore production to China, it may cover only half of Australia’s iron ore supply.
“Chinese demand of iron ore is likely to remain strong in the near term because of robust steel demand, backed by Chinese stimulus packages. However, a longer monsoon season in Brazil this year already subdued Brazil iron ore supplies, and even now, supply concern continues with the increased cases of the coronavirus in Brazil. Also the level of iron ore port stockpiles in China is well below the historical average,” Lee says.
Ralph Leszczynski, head of research at shipbroking house Banchero Costa, shares a similar point of view with his IHS Markit counterpart.
“This year, despite all the political sabre rattling, China increased its iron ore imports from Australia by 8.4% year-on-year in the first half, not because they want to but because there is no alternative. The bottleneck on the Brazil-China trade at the moment is down to the lack of Brazilian export capacity, not lack of VLOC terminals in China,” Leszczynski maintains.
However, in the long term, Leszczynski believes the situation might change as it would be in China’s interest to diversify its iron ore imports for a variety of reasons – not only political, but also commercial.
The ongoing development of Chinese deepwater ports for the valemax bulk carriers is a clear signal that Beijing is seeking to reduce its reliance on Australian iron ore
According to BIMCO, China imported a record 112.7m tonnes of iron ore in July, just shy of 10m tonnes above the previous record. July thereby marked the fourth month in a row that the country’s iron ore imports exceeded the corresponding month the year before. In the first seven months of the year, iron ore imports are up 11.8%, or an additional 69.5m tonnes, which is the equivalent of 300 extra VLOC loads.
The Chinese appetite for iron ore, and thereby rising demand for shipping, has boosted capesize earnings which averaged $24,500 per day in July.
“Geopolitics is certainly finding its way in the dry bulk business these years, and increasingly this year. Not only tankers can enjoy a freight rate upside to this lack of international cooperation/understanding – which it basically represents,” writes Peter Sand, chief shipping analyst at BIMCO, in an email to Splash.
Sand reckons China has been very discreet not to include iron ore into its trade restrictions against Australia.
“Even though Australia is more reliant on China (+90% of exports) than China is on Australia (+60% of imports), they can’t stop Australian imports overnight. This year’s strong imports numbers including the record high July data of 12m mt suggest that they could be in for stockpiling ahead of a trade dispute, which would harm Australian exports,” Sand reckons.
In the medium to longer term, Sand believes alternatives to the “iron ore mountain” of Australia are nowhere to be found. Higher reliance on domestic scrap metal is the best option for China, he suggests.
More in line with the original Alphabulk report is Tarric Brooker, an Australia-based journalist and economic commentator.
“The ongoing development of Chinese deepwater ports for the valemax bulk carriers is a clear signal that Beijing is seeking to reduce its reliance on Australian iron ore,” Brooker argues. “However, it will take years for Brazilian iron ore producers and those of other competitor nations to ramp up supply to levels where China’s reliance on Australian iron ore can be drastically reduced.”
Brooker reckons as much as the Chinese government may want to punish Canberra for its perceived disobedience by targeting Australia’s number one export, any course of action that has a long-term impact on supplies into China, ultimately hurts Beijing too, but there is a possibility that Beijing could limit or even stop imports of Australian iron ore for a period of months.
“With domestic Chinese iron ore production set to ramp up and Brazilian iron ore exports resumed at their pre-Covid volume, large port and steel mill stocks of iron ore could potentially allow for something like a temporary embargo or a significant limit on imports of Australian iron ore for perhaps a period of months,” Brooker says.
Reid I’Anson, senior commodity economist at commodity data intelligence provider Kpler, reckons that in the short run, Brazil would likely stand to benefit the most from a further escalation in trade tensions between Australia and China.
India, he says, is another interesting country of note given the flare-up in tensions with China over the past couple of months. In 2019, India shipped on average 1.8m tonnes in iron ore volumes towards China. This trade flow has actually been a bit stronger in 2020 given the domestic economic problems within India.
In the longer term, I’Anson thinks it is likely Africa will increasingly meet Chinese iron ore demand with countries like Mauritania, Mozambique, Guinea and Gabon seeing increases in investment and development over the coming years.
Last year, a China-backed consortium won the right to develop part of the Simandou project, which holds estimated reserves of more than 2bn tonnes of high-grade iron ore in Guinea.
Simandou has been considered as the largest high-grade iron ore deposit in the world, but it has struggled to enter production for years. The project is now expected start export iron ore from 2026. It comes at a time where West Africa to China cape trades are taking off in a big way, led by bauxite exports.
“The pandemic has changed a number of assumptions, the biggest of which includes the possibility of supply chain re-shoring or at least, re-positioning out of China. How this might influence iron ore demand outside China remains to be seen and will be important for Australia, a country that is likely going to need new sources of demand in the future. Brazil is also a big question mark. The country has serious issues when it comes to stability and while the assumption that Brazilian production will remain constant into the future is certainly the likely outcome, there is considerable variance within this outcome set,” I’Anson concludes.