Ebene Magazine – Strange China lie, that’s good for Australia

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Iron ore prices have continued to skyrocket in recent weeks and are currently at an all-time high amid mounting tensions between Beijing and Canberra.

Despite Beijing’s various threats and trade measures against all types of Australian industries, from shellfish to barley, this single factor has caused trade flows between Australia and China to continue to reach record highs.

This is really quite strange, given the comment that has been coming in from Beijing over the past six months.

Late last year, the Chinese Ministry of Industry and Information Technology (MIIT) stated that China must « resolutely » reduce steel production to below 2020 levels.

Unsurprisingly at the time, the price of iron ore fell more than 5 percent in anticipation of commodity traders that Beijing would impose restrictions on steel production in order to reduce steel production.

In early April, Chinese regulators and the Ministry of Industry reiterated that annual steel production would be reduced. They said they would work together to investigate the excess steel production, which is against Beijing’s orders.

According to Bloomberg and Westpac, Chinese steel production is indeed at a record high. In addition, steel production is currently growing by 14.4 percent on an annual basis.

As a result, China’s reliance on Australia for iron ore has only increased in recent months as the reality of scarce ore supplies in the world market continues to wane.

Needless to say, Beijing’s promise to cut steel production to curb carbon emissions doesn’t look too good.

Given that Chinese steelmakers are currently generating huge margins on their production, it currently seems unlikely that Beijing will achieve a reduction in overall steel production without more serious intervention.

According to a report by Bloomberg, the Chinese government is likely to reduce the number of special local government bonds in order to reduce various budget deficits. These special local government bonds are mainly used for high steel infrastructure spending.

A survey of economists found that total issuance of these special bonds would decrease by around 7.9 percent in 2021, the first decrease in total issuance in at least six years.

As China’s local government debt burden continues to decline, we may have already seen a result of this tightening of the belt.

Beijing has ordered the suspension of two major high-speed rail projects valued at 130 billion yuan (approximately 25 billion Australian dollars) in response to increasing debt concerns.

This reduction in the rate of growth in China’s debt burden has already been shown in a sharp decline in China’s credit impulse, which has historically been linked to commodity prices.

What we’ve seen so far is the exact opposite: raw material prices continue to rise and demand for steel remains strong.

As a result of this strong demand, Beijing introduced taxes on steel exports and cut tariffs on imports of raw steel materials from May 1st.

Despite allegations that China has « dumped » steel in several markets around the globe in recent years, Beijing suddenly seems to be unable to get enough of steel and other raw materials.

In September last year, Bloomberg reported that Beijing was planning to build a huge strategic resource reserve after observing the effects of the coronavirus crisis and the deterioration in diplomatic relations with the US and its allies.

In devising the plan for these secret stocks, which may be the largest in the world, Beijing is trying to build enough stocks to withstand supply disruptions and possible events.

Given the secret purchases of raw materials and the size of the reserves held by the National Food and Strategic Reserves Administration, we would not necessarily be aware of this if Beijing were to store large amounts of steel and raw materials.

Given that Beijing is prioritizing a higher level of self-reliance in its latest five-year plan amid mounting tensions with the United States and major commodity producers like Australia, it would not be surprising if Beijing seizes this opportunity to replenish its huge inventories.

As geopolitical tensions continue to escalate not only between Beijing and Washington, but worldwide, the International Energy Agency (IEA) has recommended that Western governments store critical minerals.

In particular, the IEA focused on minerals such as lithium and cobalt, which are essential for a green energy transition.

With China also producing around 60 percent of the world’s rare earth minerals, there are concerns that mounting tensions between major powers could disrupt supplies of these important raw materials.

These rare earth elements are important raw materials for the manufacture of smartphones and advanced guidance systems for rockets.

Despite the Chinese government’s repeated pledges to cut steel production to meet emissions targets, it is currently unlikely to happen unless Beijing puts the brakes on later in the year.

At least for now, the reasons for the record demand for steel in China are unclear.

It is possible that Beijing is stockpiling commodities as part of its latest five-year plan that emphasizes President Xi’s self-reliance and desire to prepare for an unexpected global shock.

After all, if the West is increasingly trying to store raw materials in the face of mounting tensions, it makes sense for Beijing to embark on a similar course.

Given the opaque nature of the Chinese government and the limited information we have, an educated guess may be the best we can do.

But as the aggression continues to mount in the tone of diplomatic communication between the United States and China, the possibility of Beijing storing raw materials for a crisis is certainly something to watch out for.

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