by Property investment has increased 6.8 per cent in the year to date, compared to 6.3 per cent in October. Little wonder iron ore has traded at seven-year highs.
Meanwhile, retail sales rose 5 per cent year-on-year compared to 4.3 per cent in October, a sign that domestic consumption is finally regaining its footing. That’s a lot of dairy products, wine, grains and meat being consumed.
These are an impressive set of numbers, a point unlikely to be lost on Canberra and those businesses that have profited handsomely from a relationship built on being a preferred supplier of rocks and crops to China.
But Prime Minister Scott Morrison finds himself between rocks – and the export thereof – and the hard place of defending Australia’s political and democratic sovereignty against Beijing’s wolf warriors well aware of Australia’s soft economic underbelly.
The yet-to-be-confirmed ban on Australian coal testifies to Bejing’s increasingly deft manipulation of the pain points in the trade relationship.
While coal is on the nose among green activists, by JPMorgan’s arithmetic Australia’s coal shipments to China are equivalent to one percentage point of annual gross domestic product.
JPMorgan’s economics team diplomatically lamented the coal ban had “non-trivial implications” for Australias growth outlook.
In other words, Beijing is playing for keeps.
It has gradually notched up the pain factor by targeting soft commodities – barley, beef and wine – as it’s climbed the rankings of major exports to eventually embrace coal as a cudgel against the Australian government.
Iron ore is obviously the next target, a move that would seriously hurt Australia’s economic recovery and the flow of cash into the nation’s coffers.
With BHP, Rio Tinto and Fortescue Metals Group accounting for an 11 per cent weighting in the S&P/ASX 200 Index, any halt to Australian iron ore imports would deliver a jarring blow to the market, and retirement savings.
The Australian dollar would be torched should China choose the nuclear option.
Fortunately, China has less flexibility on this front given the much-needed rebound in its economy – manifested in the strong demand from Chinese steel mills – and supply problems in rival supplier Brazil.
While China’s peak steel-making body jumps up and down about the need for a crackdown on iron ore prices, it’s not like Chinese steel makers are starving.
The reality is that East Asia blast furnace margins are around $US250 a tonne as finished steel prices are being supported by the economic recovery.
That’s the same recovery stoked by Beijing’s choice of stimulus, while the boom in iron ore prices reflects the resource vulnerabilities of China’s economic model and the enthusiasm Chinese punters have for trading iron ore futures on the Dalian Commodities Exchange.
Frankly, China’s steel mills can complain all they like, but they’re just going to have to suck it up in the short term. The vision of resource security promised by the Xi administration’s “dual circulation” development plan is a distant dream.
While suggestions of an iron ore levy are needlessly incendiary, the dynamics at play in the global market are a reminder to Beijing that power imbalances can work both ways.
