China wants to punish Australia, but the rising iron ore demand and lack of supply from Australia simply mean skyrocketing iron ore prices. Chinese steel mills cannot survive without iron ore – a basic raw material in steel manufacturing. And much to China’s chagrin, Australia remains a world leader in iron ore mining. Even China, which wants to cut down imports from Australia feels compelled to buy the bulk of its iron ore from the down under country.
Over the past one year, China has imposed steep tariffs and unofficial bans on many Australian products like barley, coal and wine, but a steep rise in iron ore prices has pushed China-Australia trade to new highs. Now, Chinese President Xi Jinping wants to ban iron ore import from Australia. He also wants to cut down steel production within China, but it seems that Chinese steelmakers won’t let him succeed.
Make no mistake, China has a near-monopoly in global steel production. It gives the paper dragon a strategic advantage over its adversaries, apart from fuelling a huge construction industry in the Communist nation that further drives economic growth. But such is Xi Jinping’s desperation to punish Australia that he is ready to let the Chinese economy take a hit by cutting down steel production.
At the end of last year, China’s Ministry of Industry and Information Technology (MIIT) had declared that the country “must resolutely” reduce production below the 2020 levels. There was speculation at the time that Beijing will impose curbs on steel manufacturing, which contributed to a 5 per cent drop in iron ore prices.
Beijing was weaponising the climate agenda to justify the reduction in steel manufacturing. Beijing claimed that it wanted to reduce carbon emissions, whereas we happen to understand that the real purpose was only to hurt Australian iron ore miners.
Yet, the steelmaking industry hasn’t really gone by Beijing’s script. Steelmakers in China are currently enjoying huge profits due to the strong demand in China from the infrastructure and construction sector. So, steel output in China actually spiked to 94.02 million tonnes in March – a record high since August 2020. At 3.03 million tonnes daily, the steel output is well above the daily average of 2.97 million tonnes in the first two months of the year.
Meanwhile, iron ore mining from Australia shows no signs of picking up pace. Weather issues hampered iron ore output in Australia in the first quarter. Anyhow, rising demand in China and slow output of iron ore in Australia pushed iron ore prices to a ten-year high of $188.70 a tonne on April 22. After that prices did ease to $185.60, but that is not really any respite for Beijing.
The Jinping administration is irked by how steelmaking in China and iron ore imports from Australia are going against what it had planned. In April, Chinese industry regulators and the Ministry of Industry reiterated plans to reduce annual steel production. In a warning to Chinese steelmakers, they said that an investigation would be launched into excess steel manufacturing against the government order.
Chinese steelmakers simply see no sense in slowing down production, just because their paranoid President wants to settle scores with Australia. Presently, steel production in China is a very profitable venture given the growing demand for the product. Steel output is therefore growing at 14.4 per cent on an annualised three-month basis.
Xi Jinping might want to cut down iron ore imports from Australia or even ban Australian iron ore altogether, but Chinese steelmakers won’t let their President take the catastrophic step. Growing steel output in China shows how things have spiralled out of the Jinping administration’s control.