BHP, Rio Tinto and FMG shrug off China-Australia trade tensions
As market volatility returns and China-Australia trade tensions persist, Australia’s large-cap iron ore miners have remained relatively unfazed.
China-Australia trade tensions simmer
In recent weeks, the China-Australia trade tensions have begun to experience increasing levels of media attention. Indeed, over the last few months – with China placing tariffs on Australian barley and suspending imports from four Australian abattoir – commentators have begun to wonder if China will target Australia’s all-important iron ore exports.
CNBC, reporting on the matter last week, mostly dismissed the feasibility of such a move, saying that ‘China has yet to target its biggest commodity import from Australia — iron ore […] because the Asian giant has very few options to source for that at the moment.’
In response to these reports, the English-language Chinese newspaper, the Global Times, argued that should it be required, China would and could cut Australian iron ore imports.
‘While there is no denying that China would face economic repercussions if it bans or restricts Australian iron ore imports, the Australian economy would definitely suffer more. It would be a big mistake for anyone to think that despite its dependence on iron ore China wouldn't cut Australian imports,’ the newspaper said.
The Global Times went on to argue that due to Australia’s dependency on the ‘Chinese market, China has wide range of potential targets if bilateral ties continue to deteriorate. And that's why restricting iron ore imports are not likely the first option, especially considering the negative impact such a move would have on the Chinese economy.’
In considering such arguments, one needs to remember that around 60% of the world’s seaborne iron ore supply came from Australia in 2019, according to the World Steel Association (WSA). Moreover, claims from the Global Times that China may source iron ore from Brazil or Africa potentially poses a number of issues.
On both counts, as the WSA notes:
‘Nation-wide lockdowns in South Africa and India and operating restrictions for mines in some states in Canada have caused considerable reductions in mining output.’
Moreover, the coronavirus pandemic has also impacted Brazil’s iron ore supply, with a judge recently ruling that Vale – Brazil’s iron ore mining juggernaut – would be required to shut down a number of its mines, effectively seeing the firm’s iron ore output reduced by ~10%.
FMG, BHP, Rio Tinto share prices shrug off geopolitical concerns, Vale surges
Investors look to have taken little heed of these geopolitical tensions: In the last month, Australia’s big three iron ore miners – BHP Group (BHP), Rio Tinto (RIO) and Fortescue Metals Group (FMG) have all seen their share prices rise significantly – with iron ore futures prices surging past US$100 per tonne off the back of supply-side concerns.
At yesterday’s closing price, FMG has been the best performing of Australia’s big three miners over the last month, rising an impressive 12.05% in that period. Elsewhere, FMG yesterday announced ambitious plans to reach net zero emissions by 2040, with the miner's CEO, Elizabeth Gaines saying:
'Fortescue has a proud history of setting stretch targets and our 2030 emissions reduction commitment, together with our goal to achieve net zero operational emissions by 2040, positions Fortescue as a leader in addressing the global climate change challenge.'
Rio Tinto, by comparison, has faced stiff criticism from the media and commentators in recent weeks, after the miner destroyed a sacred 46,000 year-old Aboriginal site.
On the other side of the world, Vale – faced with output restrictions – has interestingly seen its share price appreciate strongly in the last month, gaining 18.31% in that period, to last trade at US$10.66 per share.
At the time of writing, CME's front-month iron ore futures contract traded at US$103.46 per tonne.
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