China is rattling its trade war sabre at Australia and is threatening to bar imports of a range of products into its country.
But the market is brushing aside such fears when it comes to Australian iron ore. You can tell how relaxed investors are with the Fortescue Metals Group Limited (ASX: FMG) share price surging 6% to a record high of $13.30 in after lunch trade.
Its two bigger competitors are outperforming the S&P/ASX 200 Index (Index:^AXJO) too. The BHP Group Ltd (ASX: BHP) share price jumped 4.3% to $33.04 while the Rio Tinto Limited (ASX: RIO) rallied 6.2% to $90.64 at the time of writing.
Trade war comes to Australia
Investors are less confident about soft commodities and Chinese visitors. China is moving closer to slapping a up to 80% tariff on Australian barley and there's speculation that beef and wine exports might be next.
China's ambassador to Australia, Jingye Cheng, also threatened to stop his fellow countrymen from coming over for holidays or to study.
But experts believe China cannot afford to alienate our iron ore producers even though China is their only customer.
No one else to dance with
The problem facing the Chinese is replacing Australian ore, which UBS estimates account for 60% of the country's supply. This contrasts to Brazil's 23% market share, the only other country with the potential to make up the shortfall from Australia in any meaningful way.
However, it's unlikely that Brazil can step up to the plate.
"Channel checks suggest absenteeism in Brazil is driving weak production ahead of any [government] enforced mobility restrictions," said UBS.
"In the week to 11 May 20, Brazilian iron ore shipments were 4.2Mt [million tonnes], with YTD shipments at 87.1Mt, down 12% y/y."
Brazilian production not up to the task
At the going rate, Brazil's annual production volume is likely to be around 240Mt a year, or nearly a third below 2019.
Even if demand in Europe and other major markets like Japan were to drop due to COVID-19, the iron ore market is forecast to remain tight unless Brazil finds a way to significantly crank-up production.
But UBS thinks this will be a long shot for the Latin American (LATAM) country.
"The UBS LATAM team have [sic] taken a look at Brazil in terms of the spread of Covid-19 suggesting the spread from large cities to small towns may be increasing," explained the broker.
"New Google Mobility data shows adherence to stay-at-home measures remains low in Brazil."
High iron ore price in good and bad times
What's more, one of the coronavirus hotspots is the Para State, which is the second largest iron ore producing states in the country.
On the demand side, China's inventory of the mineral is low and that explains why the price of the commodity is holding up despite the looming global recession.
"On balance we expect the iron ore market to remain tight and support an iron ore price above US$80/t through 2020e," added UBS.
"Substitution away from Australia at the current time appears difficult, but we note China has begun to invest in iron ore in Guinea, albeit 5+ years from first production."
Looks like China needs our iron ore majors as much as they need China.
