Iron ore price may fall further as experts warn of China trade risk

Could iron ore be the next Aussie export on China’s chopping block?

| More on:
a man holds his hand over his mouth in a nervous gesture with a slight frown on his face as though making an unwelcome realisation.

Image source: Getty Images

Shareholders in ASX 200 companies heavily reliant on the iron ore price, like BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO), could be a little worried after the Australian Strategic Policy Institute (ASPI) said Australia’s iron ore exports with China may be at risk.

At close of trade yesterday, shares in BHP ended the day at $37.75 – up 0.59%. The Rio share price closed yesterday at $95.71 – up 0.49%. The S&P/ASX 200 Index (ASX: XJO) ended the day 0.35% higher.

Let’s take a closer look.

‘…would (the metal) join the long list of lesser Australian exports subject to Chinese coercion?’

In a report for ASPI, investment analyst David Uren argues the falling iron ore price represents an opportunity for the Chinese government to finally free itself from its dependence on Australia’s iron ore.

Australia is the cheapest and closest iron ore exporter to China and is one of the few surviving exports between the two nations. The People’s Republic has placed heavy tariffs on Australian barley, beef, wine, and seafood and completely banned Australian coal.

“[I]n a market in which there’s surplus iron ore and China has the market power, it’s possible that political rather than market forces may determine which mines survive or close. It might not be the world’s lowest cost producers, which both Rio Tinto and BHP would consider themselves to be, that win the lion’s share of the business,” said Uren.

“There’s no plausible scenario in which China can dispense with Australian iron ore but, in a market with surplus supplies, it could limit supplies through quotas. If China’s campaign of economic coercion against Australia were to continue, it could take, say, 500 million tonnes/year from Australia rather than the 740 million tonnes it bought in 2020.”

Tensions between China and Australia have ratcheted up in recent days on the announcement of a new military alliance between Australia, the United Kingdom, and the United States, AUKUS.

Iron ore price today

At the time of writing, the iron ore price today is hovering around the US $104 per tonne mark. It’s fallen 25% in a month and 34% since the beginning of the year.

The BHP and Rio share prices have both taken similar falls to iron ore. Both companies are highly reliant on the metal and their finances can be largely dependent on the commodity’s movement.

According to the website Trading Economics, cuts to Chinese steelmaking quotas have caused a slump in demand for the product and, thus, the falling price. The situation may also be exacerbated by the Evergrande implosion.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of August 16th 2021

Motley Fool contributor Marc Sidarous has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Resources Shares