How the China rift sparked a new resource boom...

How the China rift sparked a new resource boom

https://www.abc.net.au/news/2023-05-30/australian-iron-ore-boom-ending-after-china-rift/102408002

By business editor Ian Verrender


The iron ore industry's best days appear to be behind it.(ABC News: Stephen Stockwell)
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Out with the old and in with the new.
After one of the most prolonged booms in history, running for the best part of a quarter of a century, signs are emerging that Australia's great iron age is beginning to fade.
The great resources boom radically altered, some would say transformed, the make-up of our economy, squeezing out a large part of our manufacturing base during the early years of this century and providing windfall gains to government and investors.
It is no coincidence that the nation's two richest individuals, Andrew Forrest and Gina Rinehart, both scratched their fortunes from the red dirt of the Pilbara in the continent's expansive north-west.
The industry's best days, however, appear to be behind it.
While there is disagreement over the speed and severity of the approaching trade winter, there is almost universal agreement that the troubling combination of increased supply, sharply reduced demand and ongoing global political instability will see a reversal of fortune.
Iron ore prices have been in retreat for months and are now barely managing to stay above $US100 ($152) a tonne, a 30 per cent decline since March.
That's been reflected in the share prices of the mining giants and in the value of the Australian dollar, which took another turn for the worse last week.
For much of the past decade, there has been a growing unease in some quarters about the extent of Australia's reliance on just one trading partner; fears that were realised when Beijing unleashed a crippling trade war with Canberra on almost every commodity it could source elsewhere.
The only things spared were iron ore and gas.
While there have been some cosmetic efforts to rectify and rebuild the relationship, the damage has been done and we are unlikely to ever return to the way things were.
When one door shuts


Most of the world's new EVs contain lithium sourced from Australia.(Supplied: Tawana Resources)
The iron trade may be fading but a new resources boom is in the making. And, as so often has been the case throughout our short history, Australia is well placed to profit.
A global commitment to reduce greenhouse gas emissions and a shift to electrify almost everything has fuelled a new rush, this time for elements such as lithium, cobalt and rare earths along with traditional industrial metals like copper and nickel.
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A few years ago, when the great shift to globalisation was in full swing, much of the heavy lifting in producing batteries and electric vehicles would have fallen to China. To supply its factories, it would have continued plundering Africa for much of its raw materials.
Until recently, China dominated critical minerals production and was streets ahead when it came to electric vehicle production.
It controlled 60 per cent of the world's lithium mining, 77 per cent of battery-cell capacity and 60 per cent of battery-component manufacturing.
Of the 26 million electric vehicles on the road in 2022 — up 60 per cent from the previous year — more than half were in China.
But rising geopolitical tensions, with sabre-rattling over Taiwan and Beijing's tacit support for Russia following the invasion of Ukraine, have seen a rapid unwinding in trade relations and a search for alternative supplies of critical minerals.
More than 70 per cent of the world's supply of cobalt, a key ingredient in battery manufacture, comes from the Democratic Republic of Congo. And China has its foot on the bulk of that supply. The next biggest supplier is Russia.
It just so happens that Australia has rich cobalt deposits, and already produces it from waste in copper mining. And we have the world's biggest supplies of lithium, another key ingredient.
Australian lithium miners have rapidly ascended from the wings to the main stage as last year's huge jump in the price of processed material has resulted in billion-dollar profits for companies such as Pilbara Minerals. It notched up a $1.24 billion profit in the December half, up almost 1,000 per cent.

Lithium prices have tumbled this year due to a slowdown in the production of electric vehicles, but they remain high.(Macquarie/Bloomberg)
As the graph above shows, lithium prices have tumbled this year, as electric vehicle production has slowed temporarily. But they remain five times higher than two years ago.
That has been driven by a rush of interest from US vehicle manufacturers to secure supplies. Many have turned their eyes to Australia, a trend likely to be accelerated by US President Joe Biden's decision to designate Australia as a "domestic supplier".
That will make Australian companies eligible for grants under America's $500 billion Inflation Reduction Act, a bill designed to encourage US firms to invest in domestic clean energy production.
What's wrong with iron?

Nothing yet. But it's only a question of time before the luck peters out.
Iron ore mining is not a sophisticated activity. It is scooped out of the landscape, loaded onto trains, transferred to enormous bulk carriers and dispatched to China.
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We just happen to have huge quantities of the stuff and are fortunate enough to be close to the country that has urbanised faster than any other nation in history. That required steel, huge amounts of it, from the turn of the century.
When global capitalism was teetering on the brink of disaster 15 years ago, China rode to the rescue with a massive infrastructure spend that kept the global economy ticking over. It also delivered windfall gains to Australia as the price of red dirt soared and money poured in to expand the mines.
As supplies flooded the market in 2018, and prices began to drop, a series of tragic dam collapses in Brazil, Australia's biggest competitor, shut down swathes of the industry. Australia benefited from the disaster.
Just as Brazil has come back on stream, problems have begun to emerge in China. Its population not only is ageing but declining. And the housing boom that drove demand for a large amount of its annual steel production has come to an end.
In 2017, President Xi Jinping turned the screws on the country's wealthy property development barons at the 19th Party Congress, with a speech that declared that "housing was for living in not for speculation".
During the next three years, real estate giants such as China Evergrande defaulted on debts and were forced to offload assets at fire sale prices. That situation hasn't improved, with almost every indicator of China's property market going negative, as these graphs show.

This graph of property indicators shows China's property market going downward.(Reserve Bank of Australia)
This doesn't bode well for iron ore demand. The property sector accounts for about one-third of all Chinese steel production and during boom times was soaking up close to 40 per cent.
Add into that China's determination to diversify its sources of iron ore. The Simandou mine in Guinea, on the west coast of Africa, is expected to add about 100 million tonnes into the global market in the next few years.
While that is way below the 740 million tonnes we export to China, it is enough to put severe downward pressure on prices.
The great mining inflection point

Australia's mining giants aren't going to go broke any time soon.
BHP and Rio Tinto extract iron ore for around $US30 a tonne, way below the current price. Even if prices dropped to $US60 — the amount pencilled into the federal government's May budget — the majors would still be raking it in.
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But at those prices, both companies would struggle to provide the dividends and share price growth to which investors have become accustomed.
Andrew Forrest and Gina Rinehart, on the other hand, would find life tougher given their production costs are higher.
The two majors have spent a large part of the previous decade exiting fossil fuels, with BHP ramping up its interests in copper and nickel and Rio stitching up a major Lithium project in Canada. Forrest's Fortescue has made a series of daring plunges into the renewable energy industry and particularly hydrogen.
But it is a brave new world of critical minerals and the host of one-time minnows that are grabbing the limelight.
As Rio Tinto chairman Dominic Barton told a conference in March: "The industry is at an inflection point.
"We can be a catalyst of the green economy and potentially of transformative social impacts as we get to the unexplored corners of the world through mining, processing and recycling."