Extreme plan to punish China

David Llewellyn-Smith, editor-in-chief of Macrobusiness, said these blocs, led by the United States and China respectively, are being forged as the differences between the two countries become more evident by the day. in days.

He sees a “cold war 2.0” type situation brewing and thinks that Beijing is doing everything in its power to turn its back on Australia.

There is only one problem with its plan – iron ore – which China is buying at record levels to incorporate steel into its pandemic stimulus package.

Despite its attempts to lower its price, look elsewhere, and turn to new technologies to make steel, global supply is tight and China has no choice but to buy it in Australia, at exorbitant prices.

It is for this reason that Llewellyn-Smith says Australia has become a “strategic vulnerability” for China.

The idea is that despite China exercising its muscles and increasing its military activity against Taiwan, the threat of Australia cutting its iron ore has become a powerful deterrent.

In a warning about how the iron ore situation could escalate, Llewellyn-Smith said it may not even be Australia calling for cutting China.

Speaking on the Nucleus Investment Insights podcast last week, he said the United States could go so far as to “dip an aircraft carrier” off the coast of Western Australia to prevent the release of iron ore if China even suggests invading Taiwan.

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From friends to enemies

However, he started off by giving important context on how we got to this point.

Llewellyn-Smith said Australia and China were once friends, who are now “enemies” and are on the way to becoming enemies in their own right.

Despite criticism from the opposition, he believes it has nothing to do with diplomacy or the Morrison government in general, but because the differences between the two nations, politically, are too great.

He said the cracks were ironed out between 2000 and 2011, when China invested heavily in Australian raw materials, especially iron ore.

However, all of this came to an end in the years after GFC when there was a huge Australian commodity crisis.

Llewellyn-Smith said that as a result, the Australian dollar had fallen sharply, forcing a massive restructuring of our relationship with China.

“From 2013, instead of increasing our mineral exports to China, we started to increase our exports of services, education, immigration, investments in real estate, tourism, food products, wines, etc. “, did he declare. “It was the mining and restoration boom,” they said at the time.

“It went well for a few years, but it was starting to cause all kinds of political economic tensions, because what was actually happening was that instead of exporting things to China, we were importing to both Chinese and Chinese capital.

“In fact, what we mattered was influence.”

He said it became clear after a few years that the Chinese Communist Party was starting to buy the views of some Australian politicians. Chinese influence was easily noticeable in academia and the media.

“Once the Australians woke up, they practically gave him the bird,” he said.

He said that since this happened the relationship between the two nations has never been restored and is now “proceeding at a truly spectacular pace.”

Meanwhile, events across the Pacific have also added fuel to the fire. Donald Trump was seen as an aggressive figure against China, but this year has shown us that Joe Biden doesn’t play with them either.

His tough stance against Beijing is perhaps seen as the Trump administration’s only line of continuity.

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China last month accused Biden of playing politics and shirking responsibility by calling for a new investigation into the origins of the coronavirus pandemic that was first detected in China in late 2019.

Since then, the Chinese state media have been broadcasting anti-American articles daily, and relations between Beijing and Washington are so bad that the leaders of the two nations do not even speak to each other.

Every week the United States does something that irritates Beijing. This week, China is angry because the Biden administration sent 2.5 million doses of Moderna Covid-19 vaccine to Taiwan.

– a move that China sees as a political ploy as the island continues to snub vaccines from the Chinese mainland.

Two trade blocs leave Australia in a strong position

Llewellyn-Smith said this developing “Cold War 2.0 structure” is intensifying and, crucially for Australia, it is dramatically changing the world of commerce.

He sees the world effectively dividing into two trading blocs – a “liberal bloc” with the United States in the lead and an “illiberal” bloc with China in the lead.

This currently puts Australia in a strange but powerful position, as China is still so dependent on us for commodities like iron ore.

“Indeed, these two blocs are going to compete for geopolitical power and therefore China simply cannot have such a strategic import of raw materials into the wrong bloc as its supplier,” he said.

“This is a massive strategic veto that Australia has on China. China says it’s going to invade Taiwan or does, and Australia cuts down the iron ore. Either we would choose to do that or the United States would just blow up an aircraft carrier off Pilbara and it would happen anyway. “

He said it means China had a reason, like never before in its history, to move away from Australia.

“It is now a strategic vulnerability for China, so it is essential and urgent,” he said.

Given the urgency, he said China was “very angry” at the current level of the price of iron ore, despite its attempts to bring it down, and was “humbled” by its own trade war. with Australia.

“The iron ore only destroys China’s attempt to coerce Australia because they need it too much,” he said.

In the first five months of the year, China recovered 444.9 million tonnes. In 2020, China bought 81% of all Australian iron ore shipped overseas. Exporting brings in about $ 136 billion to the Australian economy per year.

Last week, it jumped to US $ 222 (AU $ 290) a tonne – its highest level in four weeks – and it has become particularly difficult for China to swallow.

Beijing hit back on Wednesday by announcing a plan to sell state reserves of copper, aluminum and zinc in a bid to lower commodity prices.

Commodity prices have taken a heavy hit since then, with the price of iron ore falling on Friday and this morning. It is now valued at US $ 217 ($ 289) per tonne.

However, it is still too high for Beijing’s taste. The CCP seeks to rapidly develop its scrap metal recycling industry and look to other parts of the world for its iron ore.

China looks to West Africa for iron ore

One place they are looking for is Guinea, a West African nation, where a hugely ambitious mega-mine is planned to pump iron ore directly to China.

The potential of the mega mine is so huge that some commentators have suggested that it could completely replace Australian iron ore production ton per ton or inject so much more supply into the market that prices would drop a cliff.

Either outcome would cripple Australia, which currently earns around $ 136 billion a year from its exports.

However, some experts believe this decision will backfire.

Michael Shoebridge, director of defense, strategy and national security at the Australian Strategic Policy Institute, told news.com.au that the project had already suffered several delays and was supposed to be online in 2015.

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“If it goes into production, its scale and production is a fraction of Australian supply and a fraction of Chinese demand. It is more likely to move smaller and more expensive suppliers than those in Australia, ”he said.

“And it’s a riskier, more difficult production and sovereign risk environment, which will drive up costs.”

He said Australian producers should be “alert but not alarmed” by what is happening in Guinea.

“They should also make smart diversification away from the Chinese single market as quickly as possible,” he said.

“Even without the growing risks from Beijing, Australia needs our ore producers to diversify into clean steel as pressure increases to reduce industrial emissions from steelmaking anyway.”