China‘s trade sanctions are failing to cripple Australia’s economy, as Beijing’s insatiable demand for iron ore keeps prices at elevated levels for years to come.
Spot prices for the commodity, used to make steel, this month climbed above $US150 ($A200) for the first time since 2013.
As of Tuesday night, prices had climbed to $US176 ($A233) a ton or levels unseen since 2011.
As recently as May iron ore, by far Australia’s biggest export, was worth just $US80 a metric tonne.
Westpac has now updated its forecasts and is expecting the key commodity to remain as high as $US100 a ton by December 2022.
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China’s trade sanctions against Australia are failing to bite with iron ore prices expected to remain at elevated levels for at least two more years. Westpac has now updated its forecasts and is expecting the key commodity to be worth $US100 a tonne by December 2022
Justin Smirk, a senior economist with the bank, said China would continue making more steel during the next two years as governments around the world used construction and infrastructure programs to pump prime economies that had been savaged by Covid-19 lockdowns.
‘We may be nearing a peak in the momentum of Chinese growth but the pace is likely to be maintained until well into 2022,’ he said.
‘The balance of risks for commodities has clearly shifted with robust Chinese growth, global fiscal and monetary stimulus and ongoing supply constraints.
‘We now expect commodity prices to remain well supported into the second half of 2021.’
China’s campaign against Australia is having little effect with exports to China in November just 0.4 per cent weaker compared with a year earlier, Australian Bureau of Statistics trade data released on Wednesday showed.
China sources 60 per cent of its iron ore from Australia as the other major producer Brazil continues to struggle following the Vale tailings dam collapse in early 2019.
‘Supply conditions are expected to improve through 2021 but not to an extent that would suppress prices in a meaningful way,’ Mr Smirk said.
Justin Smirk, a senior economist Westpac, said China would continue making more steel during the next two years as governments around the world pumped out more stimulus programs to spur demand during the Covid pandemic. Pictured is a Chinese military parade last year commemorating the Communist Party’s 70th anniversary in power
Iron ore was, by far, Australia’s biggest export in 2019-20, with China buying $70billion worth of this commodity.
China, Australia’s biggest trading partner, bought $150billion worth of exports during the last financial year.
Westpac’s iron ore spot price forecasts
March 2021: $US135
June 2021: $US126
September 2021: $US120
December 2021: $US114
March 2022: $US105
June 2022: $US100
September 2022: $US100
December 2022: $US100
March 2023: $US99
June 2023: $US93
September 2023: $US85
December 2023: $US77
March 2024: $US72
June 2024: $US70
September 2024: $US68
December 2024: $US68
That meant Beijing’s introduction of punitary tariffs on some Australian goods was having little impact on the economy as a whole.
In May, China imposed 80 per cent tariffs on barley, prompting an official complaint this month to the World Trade Organisation from former trade minister Simon Birmingham.
Australian wine also incurred 212 per cent import taxes in November, following months of trade intimidation against beef, lobster, timber, lamb and even coal exporters.
China introduced the measures after Australian Prime Minister Scott Morrison called for an independent inquiry into the spread of the Covid-19 pandemic from its source in Wuhan, China.
When it came to iron ore prices, Westpac was a lot more optimistic than the Australian government.
Treasury, in its Mid-Year Economic and Fiscal Outlook released last week, predicted iron ore prices would fall back to $US55 a tonne by the end of September 2021.
The October Budget predicted the key commodity price would fall back to $US55 by the end of June next year.
Westpac is a lot more optimistic than Treasury, forecasting iron ore spot prices of $US126 a tonne by June 2021 and $US120 a tonne by September next year.
Australia’s second biggest bank is expecting iron ore prices to stay above $US70 until mid-2024.
Higher iron ore prices also mean more government revenue from commodity royalties.
Spot prices for the commodity used to make steel this month climbed above $US150 ($A200) for the first time since 2013. As of Tuesday night, prices had climbed to $US176 ($A233) a tonne or levels unseen since 2011. As recently as May, iron ore was worth just $US80 a metric tonne. Pictured is a dump truck at the Roy Hill Mine in Western Australia’s Pilbara region
Mr Smirk said commodity prices, particular iron ore, would remain high next year as manufacturers sold what they produced.
‘Steel production continues to set new record highs, inventories continue to hold low levels while sales and prices remain robust, suggesting the Chinese steel cycle has further to run before it peaks,’ he said.
The roll-out of a Covid vaccine was also expected to boost economic growth and the Australian dollar, with Westpac expecting the currency to climb from 75 US cents now to 80 US cents by December 2021.
‘The introduction of a Covid vaccine in late 2020/early 2021 is already changing near–term perspectives of social activity and thus should help to speed up the normalisation of economic activity,’ Mr Smirk said.