Wine and wheat. Lobsters and logs. Beef and barley. If Australia exports it, China has likely impose barriers to entry over the past year, as diplomatic relations between the two countries rapidly deteriorated.
Now, one commodity is almost single-handedly continuing the trade relationship afloat. That is Australia’s iron ore.
Australia is the world’s largest producer of iron ore, unearthing more than 910 million metric tonnes in the 2019-2020 financial year, according to the Australian government, almost twice as much as its nearest competitor Brazil.
Iron ore is a vital component in the production of steel, and with China on a $500 billion infrastructure spending spree to help the economy recover from the pandemic, Beijing’s need for iron ore has never been greater.
Diplomatic relations between Australia and China declined into a deep chill one year ago, after Prime Minister Scott Morrison called for an independent investigation into the origins of the Covid-19 pandemic which threatened to challenge Beijing’s narrative of the viral outbreak.
The Chinese government said Morrison’s request was “political manipulation,” and since then Australian exports to China have faced growing barriers, while overall Chinese investment in Australia down 62% in 2020.
However, experts said that unlike wine and coal, it would be tough for China to find new sources of iron ore any time soon. That means Australia’s largest source of trade revenue may be secure and intact.
“Australia is the largest iron ore producer in the world and on the other hand China is the largest steel producer in the world,” said Heiwai Tan, professor of economics at Hong Kong University Business School.
“It isn’t that easy for them to get into a new round of trade wars over this particular product.”
Boom in mining
For more than two decades, China and Australia have helped rapidly grow each other’s economies through increasing trade in raw resources, especially iron ore and coal.
In 2000, at the start of China’s economic boom, Australian exports to the country were just over 6 billion Australian dollars ($3.6 billion). Fifteen years later, China is Australia’s largest trading partner by far in terms of exports and total value of trade — overtaking Japan, the US, South Korea and New Zealand — with exports of almost 92 billion Australian dollars ($74 billion).
Some economists claim the mining boom in Australia aided the country to avoid recession during the global financial crisis in 2008.
The trade has remained strong over the years, notwithstanding the rising political tensions between Beijing and Canberra — including new legislation designed to limit foreign interference, introduced by Australia in 2017.
By 2019, almost two-thirds of China’s iron ore imported from Australia, more than it imported from Brazil, South Africa and India combined, according to the Observatory of Economic Complexity.
Iron ore made up almost a quarter of Australia’s entire exports in 2019, 81.7% of which went to China.
The lack of diversity in Australia’s exports makes it vulnerable to any major impact on its main sources of revenue, experts said. And although there could be other markets for the country’s iron ore, they might take time to develop.
“China’s making up around four-fifths of Australian iron ore exports, so what that tells me is we don’t have too many other destinations that we do business with in a big way,” said Sean Langcake, principal economist at BIS Oxford Economics in Sydney.
However, economists said while Australia may eventually locate new buyers for its iron ore, it would be much more difficult for China to find new sources of iron ore to power its economy.
