Australia’s Economic Future Tied to Growth of Chinese Steel Industry

Here’s a question for you: what’s risen more in the last five years, the iron ore price or the gold price?

If you guessed the gold price, go the corner immediately.

Despite gold’s recent inspired dash above US$700 (US$731 at this writing) it’s up “only” 135% in the last five years, from US$310 in September of 2005. Meanwhile, the “red gold” of the Pilbara—which is some of the most in-demand dirt in the world—has risen by 189%.

BHP (ASX:BHP) hit a record high of AU$41.30 during yesterday’s trading. Rio Tinto was up nearly one dollar to AU$102.91. Both companies have ridden the iron ore train and the base metals express to higher highs over the last five years. Let the good times roll!

“Not so fast,” fast says the prime mover of Australia’s bull market. In today’s Financial Review, Zhang Xiaogang, the chairman of the China Iron and Steel Association, fired a not-so-subtle salvo across the good ship Australia’s bow. His comments should be viewed in context of the upcoming negotiations over the 2008 iron ore price. But they are still interesting as an example of the changing—and not always warm and fuzzy—nature of Australia’s economic relationship with China.

“It is due to the growth of the Chinese steel industry that the Australian mining industry is booming,” Mr. Xiaogang said in an interview with the AFR. “We need a co-operative partnership … when the market is good we all take profit together, when the market is bad we share risks together.”

“From each, according to his ability; to each, according to his need,” Karl Marx once wrote. That just came to mind. Australia is in a for-profit relationship with China. But the Chinese would like to encourage something…more communal.

“Australian iron ore suppliers and Chinese mills are linked into a chain (and) if one part is broken all of us will fall into the sea,” Mr. Xiogang added.

“A chain is only as strong as its weakest link,” one saying goes. “Man is born free, but he is everywhere in chains,” wrote Rousseau. “Workers of the world unite; you have nothing to lose but your chains,” wrote Marx.

Speaking of chains, “Credit card debt hits record high,” screams the headline in the business section of today’s Age. “Australians owe $41 billion, but interest burden steady”. Yes, for now. Until rates go up.

Back to chains. Has Australia gained chains to go along with its business partnership with China? It’s something to think about over the weekend. Australia’s growing ties with the Far East have brought huge export earnings. But ties are…ties, and Australia’s future is now bound together with China’s.

Australia’s economic relationship with China is no longer one of convenience but necessity. It’s also, of course, an epic opportunity for Aussie resource companies, their workers and their shareholders. But there are other interesting consequences, not least the larger equity stakes foreign owners are taking in Australian assets. This is a consequence of being a net importer of capital. Is it good? Bad? Who really owns Australia’s corporate profits?

We have no idea. But we wouldn’t be surprised if China—as Australia’s key resource customer—becomes a bit more assertive in voicing what it thinks Australia’s obligations are in this new cooperative partnership.

Of course China is bluffing a little, too. It needs the ore. Australia has it. And last time we checked on a map, Australia is closer to China than Brazil. Still, the strategic shift to closer ties with the Far East will have more consequences than just record exports. We just don’t know what those other consequences are…yet.

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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err…let me have a guess. besides economic consequences, how about social & political ones. australia is already heading down a ‘police state’ road, the central banks have proven to all & sundry that they are not impartial when it comes to not meddling in the market, and kevin rudd, the man who would-be pm speaks mandarin !!! considering that the chinese communist party no longer really has any ‘real’ communists in it, but one certainly wouldn’t call them libertarian, and the fact that they have proven this hatred of liberty by politically imprisoning healthy falun gong meditation practioners for their… Read more »
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