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Source: www.asiaecon.org |

CHINA TO GET TOUGH ON AUSTRALIAN MINING PRICES


The relationship between China and Australia looks to get a little dicey as possible price cuts seem imminent in the Australian mining sector. Over the last few years, China has increased its bid for Australian iron and coal by as much as 97 percent. Although some argued this was too much of an increase, China continued to raise its bid because of close relations with Australia and the rising cost of transportation. But as international demand and transportations costs shrink, China is expected to ask for a 30 to 50 percent price cut from Australia.  


The relationship between China and Australia looks to get a little dicey as possible price cuts seem imminent in the Australian mining sector. Over the last few years, China has increased its bid for Australian iron and coal by as much as 97 percent. Although some argued this was too much of an increase, China continued to raise its bid because of close relations with Australia and the rising cost of transportation. But as international demand and transportations costs shrink, China is expected to ask for a 30 to 50 percent price cut from Australia.

 

Over the past decade the economic relationship between China and Australia has grown immensely. In addition, the two countries have also maintained cooperation regarding major international and regional affairs. Both sides have benefited from the bilateral agreement as peace, stability and development have been heavily promoted.

 

Specifically, China has benefited from the ability to obtain the large amounts of iron and coal reserves available in Australia. Australia has benefited from the large amount of investment China has pumped into the country, specifically infrastructure in its mining sectors. Currently, China is Australia’s number one trading partner with 13.5 percent of exports going to China and 12.8 percent of imports coming from China. Australia’s top exports to China are coal and iron, which are also Australia’s top two exports overall.

 

But as great as the relationship has been between these two nations, the global financial crisis has the ability to undo years of work. Global demand has shrunk dramatically. Demand for Australian coal has also disappeared from other large trading partners such as Japan, South Korea and Taiwan. Because of previously agreed upon contracts, comparatively high iron and coal prices may be the last thing holding up the mining industry in Australia.

 

Because of Australia’s dependence on China, cutting prices on coal and iron could be catastrophic. Last year, Australia earned $31 billion from exporting iron and $46 billion from exporting coal. It is estimated that if China does cut prices, exports income would decrease by 4 percent of GDP.

 

The Australian government has said that it has no intention of intervening, even as many Australian miners are becoming increasingly worried about a drop in prices. They believe that even a 30 percent drop in prices would be unacceptable because thousand of jobs could be lost. Furthermore, if Australia export revenues were to drop by 4 percent of GDP, the country may be pushed into a recession.


However, some believe that a price drop many not be as imminent as first believed. The Chinese steel industry is very fragmented, and it is possible that nothing will be agreed upon in 2009. Moreover, iron benchmark prices are more likely to set by Japanese or European steel mills, weakening the bargaining power of China.

 

Further complicating the issue is the fact that China has pumped large amounts of investment into the mining infrastructure of Australia. This has created a large amount of jobs and propped up prices in the mining industry. Although this may have added numerous jobs in the past, it weakens the bargaining power of the Australian mining sector today. Turning its back on China could have even worse consequences as the bilateral trade growth has benefited both countries. Australia may have no choice but to agree with what ever price cuts China demands.

 

Source: www.AsiaEcon.org
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Source: www.asiaecon.org |


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