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China plays hardball with our iron ore · The Front

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  Speaker 1: From the Australian. Here's what's on the front. I'm Christianami
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  Speaker 1: it It's Thursday October two, twenty twenty five. Mushroom killer
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  Speaker 1: Erin Patterson has a new lawyer. Prominent human rights barrister
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  Speaker 1: twenty twenty three. State and territory leaders are in revolt
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  Speaker 1: over proposed funding changes to the National Disability Insurance Scheme.
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  Speaker 1: the overhaul and they've blasted the federal government for leaving
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  Speaker 1: public hospitals in a tight spot. Those stories alive right
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  Speaker 1: now at the Australian dot com dot au. Beijing has
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  Speaker 1: it out for Bhi. The Chinese government has reportedly slapped
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  Speaker 1: a ban on iron ore from its mines in Western
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  Speaker 1: Australia in hopes of getting a better deal on exports,
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  Speaker 1: and it's got the bean counters in Canberra worried. Today
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  Speaker 1: North Asia correspondent Will Glasgow joins me to unpack why
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  Speaker 1: China is playing hardball on steel production. Every now and
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  Speaker 1: then in this job you hear a number that absolutely
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  Speaker 1: breaks your brain. Today.
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  Speaker 2: It's this Australia's iron ore trade. Our exports of iron
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  Speaker 2: ore to China are so enormous. They're worth one hundred
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  Speaker 2: billion dollars. That's one fifth in every export dollar Australia
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  Speaker 2: makes to the whole world.
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  Speaker 1: Will Glasgow is The Australian's North Asia correspondent.
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  Speaker 2: It's nothing comes close to it. Nothing keeps the Australian
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  Speaker 2: Treasury up at night like this trade. And actually nothing
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  Speaker 2: has been so comforting for the Australian treasury for the
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  Speaker 2: last two decades as this incredibly lucrative trade.
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  Speaker 1: China has been frustrated about the dominance of Australian iron
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  Speaker 1: ore in the market for decades, and now Beijing has
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  Speaker 1: dramatically up the stakes in the fight for a better price.
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  Speaker 3: Shareholder nerves very high today is Beijing digs up trouble
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  Speaker 3: for BHP and Australia's largest export commodity. There are reports
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  Speaker 3: China has banned purchases of iron ore cargoes from the
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  Speaker 3: company's mines in Wa.
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  Speaker 2: It's very much a work in progress right where this
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  Speaker 2: all lands. But what is totally clear is this very
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  Speaker 2: very forceful negotiations going on right now, and they've got
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  Speaker 2: pretty ugly. The Chinese want to pay less and get
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  Speaker 2: BHP too, agree to longer term contracts at lower prices
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  Speaker 2: than BHP wants to sell it for. BHP and the
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  Speaker 2: other iron ore companies have always there. Their respons has
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  Speaker 2: been let the market determine now again because of just
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  Speaker 2: how oversize Australia is as a producer and China is
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  Speaker 2: as a buyer. The international ion or trade basically it's
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  Speaker 2: set by what China pays for Australian iron or. That's
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  Speaker 2: the key determined and everything else cascades from that. So
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  Speaker 2: what the Chinese are clearly trying to do. They've created
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  Speaker 2: this company. It's like probably one of the most powerful
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  Speaker 2: companies no one ever heard of before in Australia. It's
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  Speaker 2: called the China. We had a China Mineral Resources Group
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  Speaker 2: and if you haven't heard of them, you're in very
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  Speaker 2: good company. But it was created by the Chinese a
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  Speaker 2: couple of years ago. It's their attempt to consolidate the
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  Speaker 2: buying that China does. So instead of having them all
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  Speaker 2: negotiate separately their contracts with the Australian players, they want
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  Speaker 2: the Australians to have to negotiate through this one point
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  Speaker 2: of contact. It's got clear oversight from Beijing, and Beijing thanks.
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  Speaker 2: It's policymakers think if we do this in a smart way,
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  Speaker 2: we can use our buying power to get better terms
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  Speaker 2: for China.
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  Speaker 1: A handful of big Australian miners export iron ore to China.
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  Speaker 1: There's BHP, Rio, Tinto, Fortescue and Handcock. Veil from Brazil
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  Speaker 1: is our next biggest competitor.
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  Speaker 2: So they're picked. BHP is the test case and they
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  Speaker 2: want to try to break BHP or reset the price
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  Speaker 2: with BHP. If they're successful, well after BHP, you bet
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  Speaker 2: you they'll be coming for Rio. They'll be coming for Veil,
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  Speaker 2: the big Brazilian third player, and they'll be coming for
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  Speaker 2: Fortescue and Hancock right now. The flip of that is Rio,
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  Speaker 2: ford ESQ, Veil, Hancock. They will all be inn BHP's corner,
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  Speaker 2: hoping that they can withstand this from the Chinese and
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  Speaker 2: not buckle to this and just hold on that principle
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  Speaker 2: that let the market determine it. The other thing that
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  Speaker 2: hangs over all less it's interesting is towards the end
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  Speaker 2: of the year, soon finally some iron ore is going
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  Speaker 2: to come on the market from this big project. It's
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  Speaker 2: been called the Pillbrikiller. I think that's a bit hyperbolic,
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  Speaker 2: but this big project in the west of Africa in Guinea,
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  Speaker 2: and that project is a joint venture between Rigo Tinto
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  Speaker 2: and a big Chinese state owned company. Now the Chinese
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  Speaker 2: idea with that project is if they can bring the
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  Speaker 2: iron ore from that project into the world supply, ultimately
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  Speaker 2: most of that's going into China, they can then increase
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  Speaker 2: the amount of iron ore in the world and the
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  Speaker 2: laws of supply and demand mein the price will come down.
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  Speaker 2: That's what they hope. So it's all part of this
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  Speaker 2: systemic effort by China to give itself more options and
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  Speaker 2: erode that market dominance that the Australian companies have had.
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  Speaker 1: Do you understand how we got here? You've got to
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  Speaker 1: go back to the mid two thousands when the global
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  Speaker 1: economy was in turmoil. The in depth coverage now on
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  Speaker 1: the growing financial crisis, it was.
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  Speaker 4: A manic Monday in the financial markets.
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  Speaker 1: The Dow tumbled more than five hundred points.
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  Speaker 2: What the pack is going on down here, I don't know, and.
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  Speaker 4: That is the largest single day point loss ever.
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  Speaker 1: China tried to rescue its economy through a massive stimulus
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  Speaker 1: package that focused on construction. To build you need steel,
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  Speaker 1: and to make steel you need iron ore. Enter Australia.
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  Speaker 2: China had the Bizuoka response. This enormous stimulus effort within
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  Speaker 2: China and Australia benefited like no other economy in the world.
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  Speaker 2: But what it did was they built a lot of stuff.
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  Speaker 2: It was very much an infrastructure led policy and it
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  Speaker 2: required mountains and mountains of iron ore, almost two thirds
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  Speaker 2: of which came from Australia. So it was during the
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  Speaker 2: rud government around twenty ten this thing blew up at
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  Speaker 2: the anger from the Chinese. If you remember, there was
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  Speaker 2: an executive at Rear Tinto Stern who a Chinese Australian
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  Speaker 2: who got detained and imprisoned in China.
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  Speaker 4: Suessmon Stern, who has been sentenced to ten years jail.
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  Speaker 4: A court in Shanghai found him guilty of accepting bribes
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  Speaker 4: and stealing commercial secrets while head of Rio Tinto's iron
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  Speaker 4: ore operations in China.
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  Speaker 2: But look the ins and outs of that case. Put
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  Speaker 2: that to one side. What was absolutely unambiguous about that
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  Speaker 2: was behind it all was this fury from China. They
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  Speaker 2: were paying so much, so much for this trade, and
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  Speaker 2: they know. All of these companies release their data so
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  Speaker 2: everyone can see what the cost of getting this product
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  Speaker 2: out of the ground is in Western Australia and say
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  Speaker 2: in the BHP case, they can now produce iron ore
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  Speaker 2: in the Pilbra for about twenty US dollars a ton.
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  Speaker 2: China right now, in this moment of fury, is paying
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  Speaker 2: more than one hundred US dollars a ton. So the
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  Speaker 2: profit on this trade is bonkers. And that's happening in
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  Speaker 2: a world where China's real estate sector is in a
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  Speaker 2: historic slump, it's four years into that. And also in
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  Speaker 2: a world where Chinese state backed steel industry is losing
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  Speaker 2: a lot of money, a lot of them are unprofitable.
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  Speaker 2: So the Chinese system just cannot believe what is going
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  Speaker 2: on in this world where our end is losing so
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  Speaker 2: much money, but the Australian end is just creaming us.
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  Speaker 1: Can China's steel production industry and by extension, its economy
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  Speaker 1: actually survive without Australian iron ore in the mix. If
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  Speaker 1: this does.
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  Speaker 2: Hold, yeah, well it certainly can't indefinitely, right unless China
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  Speaker 2: wants to give away some of its share of the
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  Speaker 2: steel industry. And look, frankly, much of the world would
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  Speaker 2: share that on. I mean, they're upset because they are
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  Speaker 2: so reliant and iron ore, but that's because they've got
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  Speaker 2: us into a world where more than half of the
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  Speaker 2: world steel, more than half of the world's steel is
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  Speaker 2: made in China by Chinese state owned companies, and that's
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  Speaker 2: continuing even four years into this epic historic property slump
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  Speaker 2: in China. So a lot of people thought following the slum,
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  Speaker 2: the steel industry in China would contract. Instead, it's plateaued.
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  Speaker 2: It's been a really extraordinary development. So I think I
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  Speaker 2: think one of the reasons that Chinese are able to
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  Speaker 2: do this right now is if there's a bit of
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  Speaker 2: slack in this steelmaking, the Chinese economy can get buy it,
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  Speaker 2: because frankly, it's been a bit peculiar. How on earth
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  Speaker 2: have they continued to produce at such levels. People and
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  Speaker 2: the big miners and the Australian government scratch their heads
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  Speaker 2: about that. They've continued to buy, so clearly they're finding
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  Speaker 2: a use for it. But it has been a bit strange.
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  Speaker 2: Everyone in the Chinese steel sector is very frank that
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  Speaker 2: these are not good times. I think they're trying to
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  Speaker 2: use that crisis to get some progress on this, just
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  Speaker 2: because there just isn't such screeching demand at all for
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  Speaker 2: iron ore in this steel industry at the moment. You know,
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  Speaker 2: we'll say high stakes.
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  Speaker 1: Coming up. What a fight over iron ore means for
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  Speaker 1: Australia China relations. Asked about a band reportedly slapped on
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  Speaker 1: Australian iron ore by Beijing, Anthony Albanezi said he's not mad,
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  Speaker 1: just disappointed.
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  Speaker 5: Well, I am concerned about that, and of course we
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  Speaker 5: have seen those issues in the past. I want to
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  Speaker 5: see Australian iron ore be able to be exported into
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  Speaker 5: China without hindrance.
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  Speaker 1: Here's will Glasgow.
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  Speaker 2: Quite naturally, when something like this happens, people think what's
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  Speaker 2: it linked to in the bilateral relationship?
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  Speaker 4: Right?
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  Speaker 2: And China's trained us sort of think that way. I mean,
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  Speaker 2: that's so political. They're very comfortable, as we in Australia
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  Speaker 2: know very very well with linking political diplomatic disputes with
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  Speaker 2: trade and trying to use trade or access to China
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  Speaker 2: as a reward for what they would call good or
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  Speaker 2: acceptable bay. But look, that is a real dynamic. China
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  Speaker 2: does do that, but they also all the while are
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  Speaker 2: making rational decisions on what's best for the Chinese economy.
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  Speaker 2: So if we go back, we did a spectacular experiment
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  Speaker 2: in Australia with Chinese trade policy and use of trade
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  Speaker 2: coercion from twenty twenty to well it only ended officially
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  Speaker 2: actually at the start of this year twenty twenty five,
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  Speaker 2: but in the real peak of this thing, when China
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  Speaker 2: was putting coercive measures on various Australian products, they never
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  Speaker 2: touched iron ore, They never touched alan g Those were
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  Speaker 2: the two that were absolutely off limits from the Chinese
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  Speaker 2: all the way through, and that was when they were
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  Speaker 2: furious with the Australian government. Why is that, Well, they
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  Speaker 2: don't have options. You know, Brazil doesn't produce enough. If
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  Speaker 2: they blocked Australian iron ore, wow, they'd pay a lot
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  Speaker 2: for Brazilian iron because it's the only other substantial producer
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  Speaker 2: of the stuff. But the Brazilians already can't produce it
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  Speaker 2: as cheaply and get it to China as the Australians
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  Speaker 2: can so they could only do that by taxing themselves hugely. Essentially,
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  Speaker 2: all this is happening as in Chinese state media right now.
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  Speaker 2: They are putting up Australia as the poster child for
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  Speaker 2: other Five Eyed countries, particularly Canada. They've just blocked canola
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  Speaker 2: and rape seed from Canada. They've been the biggest buyer
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  Speaker 2: of Canadian canolar and rape seed, and there's reports that
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  Speaker 2: they've finally, after years of blacklisting Australian rape seed, they've
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  Speaker 2: just started buying Australian canola. And it looks all the
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  Speaker 2: reports are signaling that to punish Canada for high high
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  Speaker 2: tariffs they put on Chinese evs, they're going after Canadian
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  Speaker 2: agricultural exporters. Back in twenty twenty, Australia's farmers were losing
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  Speaker 2: out to Canada, to America took to all other agricultural traders.
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  Speaker 2: This time around, Australia is the one benefiting from that.
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  Speaker 1: Will Glasgow is the Australians North Asia correspondent. You can
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  Speaker 1: read his reporting right now at the Australia dot com
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  Speaker 1: dot au