China should consider alternatives for Australian iron ore as trade tensions simmer, analyst says

Iron ore on railway wagons at Salanaha Bay Terminal in South Africa.

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SINGAPORE — As tensions between Australia and China continue to simmer, Beijing needs to think about diversifying the supply of one key commodity from Down Under, according to an analyst.

Beijing imports 60% of its iron ore from Australia, and is heavily dependent on the commodity, which it uses to make steel. China is the world’s top producer of steel.

Other Australian exports to China have been affected by the deteriorating relationship between the countries, with Beijing hitting goods such as wine and barley with tariffs. Bilateral relations between Canberra and Beijing soured earlier this year after Australia supported a growing call for an international inquiry into China’s handling of the coronavirus pandemic.

But Beijing has, so far, spared iron ore from Australia, which analysts attributed to the lack of alternatives available. Australia is the world’s largest iron ore producer.

However, Peter O’Connor, senior analyst of metals and mining at investment firm Shaw and Partners, says that Beijing now needs to consider diversifying its supply of iron ore.

“That direction or that narrative that we need to think about, that started several years ago … was about diversity of supply. It’s where can China source, how can they diversify away from Australia, also Brazil,” he told CNBC’s “Street Signs Asia” on Tuesday.

Brazil is the next largest supplier of iron ore to China, but has its own slate of issues. In January 2019, a deadly dam disaster at a Vale iron ore site led the Brazilian mining giant to halt production at ten locations. Vale is the world’s second-largest iron ore producer, and its biggest market is also China.

Following that accident, Brazil has struggled to get its iron ore exports back to 2018 levels, said Vivek Dhar, director of mining and energy commodities research at the Commonwealth Bank of Australia.

Iron ore prices recently spiked as demand from China rose, and have been further stoked by dwindling supply and disruptions caused by storms hitting Australia. At the same time, China’s economy has largely recovered from the worst of the coronavirus hit, fueled in part by funneling stimulus into infrastructure.

One possible source of iron ore

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