China is making Australia rich as record-breaking iron ore prices lift revenues for both miners and the Australian government, despite a long-standing bilateral political conflict, but Australia is unlikely to enjoy another decade-long mining “boom”, according to analysts and economists.
Canberra, which recently began discussing the possibility of “war” with China, likely gained an additional A$37 billion (US$28.75 billion) in revenue in the past year due to the skyrocketing price of iron ore, which surpassed US$230 a tonne last week, topping the previous record of US$200 set about a decade ago.
Iron ore was selling for about US$80 a tonne before the Chinese government introduced its US$500 billion pandemic stimulus last May, propelling both the demand and price of iron ore.
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For every US$10 rise in the price of iron ore, the Australian government’s revenues – in the form of company taxes and royalties – rise by about A$2.5 billion, while Australia’s annual export earnings rise by A$11 billion, experts say.
“Political posturing and tensions aside, this is therefore one of the most incredible transfers of wealth between the pockets of the Chinese and Australian governments,” said Navigate Commodities’ iron ore analyst, Atilla Widnell. “The Australian Treasury could benefit from an extra US$34 billion to US$37 billion added to its coffers if iron ore prices are sustained above US$200 a tonne.”
Despite their heated feud over the past year that has led to China blocking various Australian exports, including coal and wine, the iron ore trade has remained unscathed. Exports remained buoyant amid strong demand for the steel raw material on the mainland as the Chinese stimulus pushed up property and infrastructure construction.
Australia is the biggest iron ore exporter to China, which gets about 60 per cent of its iron ore from down under.
Three of the four biggest exporters to China are Australian miners BHP, Rio Tinto and Fortescue Metals Group, which pay company taxes to Canberra as well as royalties for the right to extract minerals from federal and state government-owned land.
The gains currently being made by the Australian government and miners have shot past those made during the last boom, which ended in 2013. In addition to the record high price of iron ore, the costs for miners are now lower, and China is consuming much larger volumes, Widnell said.
According to CRU Group’s steel and iron ore analyst, Erik Hedborg, miners need iron ore prices to top just US$50 a tonne to break even in about two-thirds of its seaborne exports.
Some low-cost Australian iron ore miners can ship iron ore for even lower, at about US$30 a tonne, giving them “effectively US$180 a tonne of pure margin”, Widnell added.
On Monday, iron ore prices closed at around US$217 after prices started sliding at the end of last week when the Chinese government said it would crack down on iron ore futures speculation.
The revenue increase for Australian miners and governments begs the question of whether Australia – dubbed a “lucky country” for defying the global financial crisis in 2007-08 due to similar conditions – is in the midst of another mining boom.
The bulk of these [mining] exports remain skewed towards China, where Australia is running a massive trade surplus
Stephen Koukoulas, Australian economist
This time around, veteran Australian economist Stephen Koukoulas is seeing similar hallmarks of the last boom.
“In my view, there is a mining boom now – prices [are] high, export volumes [are] good, and [we are seeing] monthly international trade surpluses,” he said. “We are even seeing the mining sector talking about a lift in capital expenditure in new and expanded mines – taking advantage of high prices.
“And yes, the bulk of these exports remain skewed towards China, where Australia is running a massive trade surplus.”
According to a 2010 speech made by the Reserve Bank of Australia’s then-deputy governor, Ric Battellino, “the distinguishing features of a mining boom are significant increases in mining investment or mining output – usually both – which go on to have important macroeconomic consequences”.
Australia has had about five of those booms, according to Battellino, starting with the gold rush in the 1850s and ending with the one between 2005 and 2013 that was not only a mineral boom but an energy boom, with the prices of liquefied natural gas (LNG), coal and investments also rising. Key to the last boom was China’s demand for these commodities.
“It has been, to a large degree, driven by demand for resources by emerging economies, with China being the most significant,” Battellino said.
But what also gave longevity to the last boom was investments in mining projects, which has been less evident this time around, particularly given China’s long-term emission-reduction policies, according to a note on Friday by Marcel Thieliant, Capital Economics’ senior Japan, Australia and New Zealand economist. LNG prices are also much lower, he added.
“We suspect that ‘metal ore’ investments may rise a bit further, given that it’s still below the peak reached during the last mining boom,” he said. “However, companies will be mindful of China’s plans to reduce carbon emissions from the steel sector. And we still expect China’s property investments to slow as developers face tighter financing constraints, which is why we expect the iron ore price to fall to US$140 by year-end.
“As such, a mining investment boom 2.0 is unlikely, even if iron ore prices remain high.”
The urgency to build mining projects during the last boom is also absent this time around, as trade uncertainties mean miners are more wary of ramping up production through more investments, AMP Capital chief economist Shane Oliver said.
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Meanwhile, Thieliant expects Australian miners to distribute profits to shareholders, so not only will the miners and governments experience a windfall, everyday Australians could also see their wealth grow.
Oliver dubbed 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. “This is very different to the 2000s when it reflected China’s rapid industrialisation, which led to commodity demand well above global supply potential. So, it may fade more quickly this time once the stimulus ends and consumer demand goes back to services with re-openings.”
Neither Australia’s Department of Industry, Science, Energy and Resources, nor the mining sector lobby group Minerals Council of Australia, have characterised the current iron ore price surge as a boom. However, the Australian government’s latest Resources and Energy Quarterly publication in May forecasts that mining exports will remain strong for the next five years.
The Reserve Bank of Australia provided arguably the biggest insight in its statement of monetary policy released two weeks ago, when it said there were few indications that major miners were planning to expand iron ore-related investments in response to higher iron ore prices.
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