July 21, 2020 / 3:53 AM / 21 days ago

Breakingviews - Crisis forces Australia and China closer

A miner holds a lump of iron ore at a mine located in the Pilbara region of Western Australia, December 2, 2013. REUTERS/David Gray

HONG KONG (Reuters Breakingviews) - Australia and China are stuck with each other despite diplomatic tensions. Supply disruptions in Brazil and weak global demand have left the two trading partners even more dependent on each other, which is letting miners BHP and Rio Tinto cash in on Beijing’s infrastructure stimulus.

BHP, the world’s biggest miner, said on Tuesday that production of iron ore, a key steel-making ingredient, rose 11% in the three months ending June from the previous quarter. That suggests demand from the People’s Republic, BHP’s top customer, is picking up quickly as Beijing’s tries to build its way out of recession. The $127 billion company says if China can avoid a second Covid-19 wave, annual steel production in the country will rise this year, whereas steel production in the rest of the world will “contract by a double-digit percentage”.

    

Its peer Rio said something similar last week. As the world’s top steelmaker, China buys up some three-quarters of iron ore shipments worldwide, according to Jefferies, with the bulk of it coming from Down Under. That keeps the mineral, not tourism or education, at the centre of Sino-Australia trade. Last year, China imported some 665 million tonnes of it from Australia, equivalent to nearly two-thirds of total iron ore imports, according to S&P Global Market Intelligence. Official figures show that has generated some A$79 billion ($55.6 billion) in earnings for Australian exporters.

The co-dependency endures even as diplomatic relations between Canberra and Beijing explore new lows. Beijing has targeted Australian barley products and warned citizens against travelling or studying in the country. Australia, for its part, just suspended its extradition agreement with Hong Kong after Beijing cracked down in the former British colony.

But Brazil’s Vale, another major mineral exporter, is still recovering from last year’s catastrophic tailings dam disaster and the worsening pandemic. That makes BHP and Rio even more indispensable. Beijing’s efforts to reduce its reliance on Australia by investing in regions like Africa will take years, if not decades, to come to fruition. For now, toxic politics can’t change facts under the ground.

Breakingviews

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