China-Australia relations: is this the start of the ‘mining boom 2.0’ as Canberra raises money from the iron ore rally?


China enriches Australia as record iron ore prices boost revenues for miners and Australian government despite long-standing bilateral political conflict, but Australia unlikely to experience another mining ‘boom’ than a decade, according to analysts and economists.

Canberra, which recently began discussing the possibility of “war” with China, has probably earned A $ 37 billion (US $ 28.75 billion) in additional revenue over the past year due to the surge in the price of iron ore, which exceeded US $ 230 per tonne last week, surpassing the previous record of US $ 200 set a decade ago.

Iron ore was selling for around US $ 80 a tonne before the Chinese government introduced its $ 500 billion in pandemic stimulus last May, propelling both the demand for and the price of iron ore.

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For every US $ 10 increase in the price of iron ore, Australian government revenues – in the form of corporate taxes and royalties – increase by approximately A $ 2.5 billion, while revenues for Australia’s annual exports increase by AUD 11 billion, experts say.

“Political postures and tensions aside, this is therefore one of the most incredible transfers of wealth between the pockets of the Chinese and Australian governments,” said Atilla Widnell, iron ore analyst at Navigate Commodities. . “The Australian Treasury could benefit from an additional US $ 34 billion to $ 37 billion in its coffers if iron ore prices remain above US $ 200 per tonne.”

Despite their fiery quarrel in the last year which led China to block various Australian exports including coal and wine, the the iron ore trade has remained unscathed. Exports remained buoyant amid strong demand for steel raw materials on the continent as Chinese stimulus measures boosted the construction of properties and infrastructure.

Australia is the largest exporter of iron ore to China, which derives about 60 percent of its iron ore from the bottom to the bottom.

Three of the top four exporters to China are Australian miners BHP, Rio Tinto and Fortescue Metals Group, which pay corporate taxes in Canberra as well as royalties for the right to extract minerals from federally owned land and to the states.

Gains currently made by the Australian government and miners have exceeded those made during the last boom, which ended in 2013. In addition to the record price of iron ore, costs for miners are now lower and China is consuming a lot. larger volumes, Widnell said.

CRU Group steel and iron ore analyst Erik Hedborg says miners need iron ore prices to only exceed US $ 50 per tonne to break even by around two-thirds of its maritime exports.

Some low-cost Australian iron ore miners can ship iron ore at an even lower price, at around US $ 30 per tonne, which gives them “effectively US $ 180 per tonne of pure margin,” Widnell added. .

Iron ore prices closed at around US $ 217 on Monday after prices started to fall late last week when the Chinese government announced it would crack down on speculation in ore futures. of iron.

Rising incomes for miners and Australian governments raise questions as to whether Australia – dubbed a ‘lucky country’ for defying the global financial crisis in 2007-08 due to similar conditions – is in the midst of a boom. another mining boom.

Most of these [mining] exports remain skewed towards China, where Australia has a massive trade surplus

Stephen Koukoulas, Australian economist

This time around, veteran Australian economist Stephen Koukoulas sees similar signs of the latest boom.

“In my opinion, there is a mining boom now – prices [are] high export volumes [are] good and [we are seeing] monthly international trade surpluses, ”he said. “We’re even seeing the mining industry talk about increased capital spending in new and expanded mines – taking advantage of high prices.

“And yes, the bulk of these exports still go to China, where Australia has a huge trade surplus.”

According to a 2010 speech by Ric Battellino, then vice-governor of the Reserve Bank of Australia, “The hallmarks of a mining boom are significant increases in mining investment or mining output – typically both. – which continue to have important macroeconomic consequences ”.

Australia has seen about five of these booms, according to Battellino, starting with the Gold Rush in the 1850s and ending with the one between 2005 and 2013 which was not just a mining boom but an energy boom, with the prices of liquefied natural gas (LNG), coal and investments also on the rise. China’s demand for these commodities was key to the latest boom.

“It was, to a large extent, driven by demand for resources from emerging economies, China being the most important,” Battellino said.

China ‘well positioned’ to exceed carbon emissions targets, experts say

But what also gave longevity to the latest boom was investment in mining projects, which has been less obvious this time around, especially given China’s long-term emission reduction policies, according to a note published Friday by Marcel Thieliant, head of Capital Economics in Japan. , Australian and New Zealand economist. LNG prices are also much lower, he added.

“We suspect that investments in ‘metallic ores’ could increase a bit more, given that they are still below the peak reached during the last mining boom,” he said. “However, companies will be aware of China’s plans to reduce carbon emissions from the steel industry. And we still expect China’s real estate investment to slow as developers face tighter funding constraints, which is why we expect the price of iron ore to drop to $ 140 by the next. end of the year.

“As such, a 2.0 mining investment boom is unlikely, even if iron ore prices remain high.”

The urgency to build mining projects during the latest boom is also absent this time around, as business uncertainties mean miners are more reluctant to increase production through more investment, said chief economist of ‘AMP Capital Shane Oliver.

Australian iron miners to evade Beijing ‘punitive trade measures’ as small exporters scramble for new markets

Meanwhile, Thieliant expects Australian miners to distribute profit to shareholders, so not only will miners and governments have a boon, but everyday Australians will be able to see their wealth grow as well.

Oliver called the current surge in iron ore prices a “cyclical burst” driven by global post-pandemic stimuli.

“It may also reflect strong consumer demand for goods,” he said. “It’s very different from the 2000s when it reflected the rapid industrialization of China, which led to a demand for raw materials far greater than the potential of global supply. So, it may fade faster this time around once the stimulus ends and consumer demand returns to services with reopenings. “

Neither Australia’s Department of Industry, Science, Energy and Resources, nor the mining industry lobby group, the Minerals Council of Australia, have called the current surge in iron ore prices a boom. However, the last Australian government Quarterly resources and energy The publication in May predicts that mining exports will remain strong over the next five years.

The Reserve Bank of Australia arguably provided the biggest insight in its monetary policy statement released two weeks ago, when it said there were few clues that the big miners were planning to step up. iron ore investments in response to rising iron ore prices.

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