Iron ore on rail cars at Salanaha Bay Terminal in South Africa.
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SINGAPORE – As tensions between Australia and China continue to simmer, Beijing needs to consider diversifying the supply of a key commodity from Down Under, according to an analyst.
Beijing imports 60% of its iron ore from Australia and relies heavily on the raw material it uses to make steel. China is the largest steel producer in the world.
Other Australian exports to China were impacted by the deteriorating relationship between the countries, with Beijing hitting goods such as wine and barley at tariffs. Bilateral relations between Canberra and Beijing soured earlier this year after Australia backed a growing call for an international investigation into China’s handling of the coronavirus pandemic.
But Beijing has so far saved iron ore from Australia, which analysts blame for the lack of available alternatives. Australia is the world’s largest iron ore producer.
However, Peter O’Connor, senior metals and mining analyst at investment firm Shaw and Partners, says Beijing should now consider diversifying its iron ore offering.
“That direction or story that we need to think about, that started a few years ago … was about the diversity of the offer. It’s where China comes from, how can they diversify away from Australia, including Brazil,” he said to CNBC’s “Street Signs Asia” on Tuesday.
Brazil is the second largest supplier of iron ore to China, but it has its own problems. In January 2019, a deadly dam disaster at an iron ore site in Vale led the Brazilian mining giant to shut down production at ten sites. Vale is the world’s second largest iron ore producer and the largest market is also China.
Following that accident, Brazil is struggling to bring its iron ore exports back to 2018 levels, said Vivek Dhar, director of mining and energy carrier research at the Commonwealth Bank of Australia.
Iron ore prices recently rose as demand from China rose, further fueled by diminishing supply and disruptions caused by storms hitting Australia. At the same time, the Chinese economy has largely recovered from the worst blow from the coronavirus, fueled in part by stimulus in infrastructure.