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Power games among major powers as seen in the analysis of high ——prices of bulk commodities such as iron ore and coal
2021年1月27日
An autonomous vehicle drives along a road as it collects iron ore at Australia's Fortescue Metals Group (FMG) mine in the Pilbara region, located south-east of the coastal town of Port Hedland in Western Australia, November 29, 2018. Picture taken November 29, 2018. REUTERS/Melanie Burton (Australia)
An autonomous vehicle drives along a road as it collects iron ore at Australia's Fortescue Metals Group (FMG) mine in the Pilbara region, located south-east of the coastal town of Port Hedland in Western Australia, November 29, 2018. Picture taken November 29, 2018. REUTERS/Melanie Burton (Australia)

At the end of 2020, iron ore and coal prices drastically soared in the global market. These two raw-material-level primary products are closely related to our lives, and steelmaking requires large quantities of ore and coal. Moreover, steel materials are used in a wide range of fields such as real estate, large-scale infrastructure construction, automobiles, home appliances, and so forth. Coal is also widely used in many fields such as power generation and heating. There has been a relative oversupply of these two commodities in recent years in terms of resource reserves and production capacity. So why did they both rise sharply in the second half of 2020? The following is a summary of some views of the media and scholars in China, and my thoughts from the following two perspectives.

  1. Competition between Australia and China spurred on by the U.S.–China great power rivalry was the ostensible cause of the recent price hikes in iron ore and coal

Recent highs in iron ore and coal prices are the result of political and economic trade competition between Australia and China, which has been spurred on by the U.S.–China great power rivalry. China is a major consumer of iron ore and coal. Furthermore, a large proportion of the iron ore and coal that China imports comes from Australia, and the proportion of iron ore in particular is high. China is the largest country in the world in terms of the scale of infrastructure construction, but its own iron ore is not only costly and inferior in quality, but also for the most part insufficient in quantity. China needs to import 1.1 billion tonnes of iron ore each year, of which about 700 million tonnes come from Australia, accounting for approximately 67%. Besides this, 19% comes from Brazil, 3% from South Africa, 2% each from Peru and Malaysia, and about 7% from other countries. Such gross import volume and structure have prompted China to be dependent on Australia for iron ore.

With China’s economy rapidly recovering from the Covid-19 disaster, things like large-scale infrastructure construction, urbanization, and an internal economic cycle are all rapidly expanding, requiring more coal and iron ore. Coal consumption in China is considerably large, exceeding 3.7 billion tons for the year 2019. As a matter of fact, China is not short of coal; underground coal reserves are available for at least 300 years. The problem, however, is that the distribution of coal resources in China is extremely uneven, with relatively more in the north and northwest and less in the southeast. However, its economic center is in the southeast, especially in the southeastern region. Coal is a large-volume commodity, and the cost goes up as the volume of transportation increases. Normally, the cost, insurance, and freight (CIF) from Australia to a Chinese port by sea is cheaper than the output price of a coal mine in Shanxi. Another reason is that most of the coal in China is lignite, which costs a lot to mine and is low in calorific value. Even if the coastal economic development provinces in southeast China import coal from countries such as Australia and Indonesia, the quality is better and the shipping cost is lower. China therefore has to import nearly 300 million tons of coal every year. Thus, China’s total annual coal consumption is 4 billion tonnes, accounting for about half of the global coal consumption. But actually, Australia is not dominant in the global coal output and Free On Board (FOB). The world’s largest coal producer is Inner Mongolia, a region in China, with an annual output of 1 billion tons.  It is followed by China’s Shanxi Province in second place with 970 million tons, India in third with 710 million tons, and China’s Shaanxi Province in fourth with 630 million tons. The main sources of coal imported by China are Indonesia, Australia, the Philippines, Mongolia, and Russia. From Australia’s standpoint, coal is mainly sold to India, Japan and China. China’s relations with Australia have not been very favorable in recent years. One important cause is that the United States drastically changed its policy toward China after Trump took office and began to contain China on all fronts. Australia is following the U.S. and spearheading the effort. Australia’s eagerness to counter China stems not only from ideological reasons, but also from concerns that China’s influence in Oceania and Australia will become too strong. Australia has an area of 7.7 million square kilometers, but its population is only about 25 million, less than the actual permanent population in Beijing or Shanghai. Australia is the closest relatively large English-speaking country to China, so it has been a major destination for Chinese immigrants. As the number of Chinese immigrants increases, their influence also begins to grow, causing tension and resistance among white groups in Australia. Besides this, Australia has consistently extended its sphere of influence to Oceania. After China’s growing influence, Australia began to feel pressure. China has become not only an external competitor but also a potential internal risk. Australia is a member of the “Five Eyes” established by the U.S. and the closest allies of the U.S. In addition to limiting the number of Chinese immigrants and restricting their participation in politics, the country also responded to Trump’s call for banning Huawei devices and participated in the U.S.’s Freedom of Navigation operations, making a show of force by sending warships to the South China Sea. However, the Australian authorities have forgotten an important point. That is, the country is highly dependent on China economically. In particular, 40% of its exported products are destined for China, including iron ore, coal, liquefied natural gas, milk and seafood. Now that Trump has lost the presidential election, Australia is in an awkward situation. China should naturally impose sanctions on countries like Australia that “spit on China while they are benefiting from China.” Thus, one media outlet recently reported that at least 53 shipments of Australian coal cargo were stranded at sea and temporarily unable to enter Chinese ports. Dozens of shipments of liquefied natural gas cargo were also unable to enter ports in China. Given the Chinese disposition, even if there was a domestic shortage of coal and electricity, China would retaliate against a country like Australia in the same manner. China also imposed various levels of trade sanctions on Australian agricultural by-products, including barley, beef, wine, and cotton. One critic says the time has come for Australia to pay a price for the arrogance and shallowness of its policy toward China. I personally agree with this view. The trade dispute between China and Australia triggered the recent surge in iron ore and coal prices. I personally suspect that the surge in iron ore prices is not only due to the element of capital speculation, but also due to retaliation on the part of Australia against China through the surge in iron ore prices, given China’s relative dependence on Australian iron ore. There is a great possibility that such circumstances exist. That is because iron ore, unlike coal, is relatively concentrated, mostly in Australia and Brazil, and is dominated by three Australian companies and one Brazilian company. Brazil is relatively important to China in terms of resources and, for example, is the main alternative to the United States in terms of China’s soybean imports. In terms of iron ore, it is the main alternative to Australia. In other words, if China restricts imports of soybeans from the United States, it will necessarily increase imports from Brazil. Likewise, if it restricts imports of iron ore from Australia, it will inevitably increase imports from Brazil. This is why Brazil has started to become arrogant. It besieged China with its elder brother, the United States. For example, recently China preferentially supplied Brazil with a vaccine for the novel coronavirus. But in return it was “bombarded with false rumors” by people in Brazil who said the standards of Chinese vaccines are unclear among other things. Furthermore, Vale, Brazil’s largest iron ore company, announced in early December that it would downwardly revise its production forecast for 2020. This added fuel to the fire in the iron ore market and caused the price hike. We can see the complexity of the great power competition through the triangular relationship of China–U.S.–Brazil in soybean competition and China–Australia–Brazil in iron ore competition. In diplomacy, it is reasonably known that there are no eternal allies, no perpetual enemies, no eternal roles, and only permanent interests. China will also suffer from a shortage of iron ore and coal and persistently high prices. At the very least, steelmakers will pass the soaring raw material prices on to real estate prices and automobile and home appliance prices in due course. A shortage of coal and rising prices will affect power generation and consequently the use of electricity by businesses and residents. This is all the more so because China’s economy is rapidly recovering from the adverse effects of Covid-19 and it is just in the midst of a severe winter. So far, China’s electricity supply has been stable and orderly, and the use of electricity in people’s lives has not been significantly affected. That said, the supply of electric power has become tight recently in Hunan and Jiangxi, and the use of electric power has also been restricted in Zhejiang. The National Development and Reform Commission of China has already taken steps to guarantee it can meet the demand for electricity for sure and ensure a stable and orderly supply of electricity across the board in cooperation with related sector companies.

I have said this before. “If we get along well, both sides will benefit; but if we get into a fight, both sides will get hurt.” Any trade war will end up with a mutual collapse and never result in a win-win situation. That is only to compete to see which wound is shallower. China is a large country with abundant coal resources, and the damage could be somewhat lessened if it started production and increased its transportation capacity. Thus, competition between Australia and China is always more damaging to Australia. Someone has estimated that if trade between Australia and China were halted, China’s GDP would fall by 0.5 percentage points, whereas Australia would lose more than 6 percentage points. After all, Australia is more dependent on China, not the other way around. As it is difficult to be a true winner in a trade war, Australia should see this point clearly if it looks at things from a long-term perspective. China is not a country that likes to fight. As it’s been traditionally said, “If you don’t pick a fight, China won’t be the first to attack.” If there is a certain level of review on Australia’s policy toward China, relations between Australia and China should gradually return to normal. But for now, the price of iron ore and coal will remain high for some time.

  1. The unrestricted quantitative easing by the Federal Reserve in 2020 stimulated a $14 trillion money supply in the world’s major countries, and this was a large factor in triggering the high prices of global assets.

According to data recently released by Bloomberg, the total money supply of the world’s 12 largest economies, including the United States, China, the eurozone, and Japan, had already reached $94.8 trillion in 2020. The world’s eight largest economies alone saw a $14 trillion increase in new currencies in 2020, exceeding not only the data for every year since 2003, but also the 2017 level of $8.38 trillion to a great extent. This is unprecedented data, and the printing of such a huge amount of money caused asset prices around the world to skyrocket time and again. The balance sheets of the world’s major central banks expanded rapidly, and the balance sheets of the Fed, the ECB, the Bank of Japan, and the BoE accounted for around 50% of GDP of each country. The size of these central banks’ debt, which was only 10% in 2008 during the subprime loan crisis and only 36% in 2019, has already increased several fold in just 10 years. This will inevitably lead to asset price bubbles, massive inflation or a global debt crisis at any time. The expansion of the central banks’ balance sheets was essentially caused by quantitative easing. Quantitative easing is in fact a liability, which will be mostly turned into national government debt. In the past 10 years, the government debt of these countries has rapidly expanded, and it surpassed $28 trillion in the U.S. government debt alone. During his four years of tenure, President Trump repeatedly pressured the Fed to implement negative interest rates, and this businessman president thought that if he only issued Treasury bonds at negative rates, the U.S. government would be able to pay back less and furthermore earn money in this way. Trump also thought the United States should do the same as Europe that had already implemented negative interest rates, or else the U.S. would be outdone by Europe. Prices of the sectors into which these currencies have flowed will massively soar. As a result of the influx into the bulk commodity sector, the sector’s prices skyrocketed around the world. Iron ore prices repeatedly rose, copper prices repeatedly went up, and nonferrous metal prices repeatedly rose. This is therefore the root cause of hyperinflation and the high asset price bubble.

History has proven the following. That is, if the dollar index exceeds 90 in general, global liquidity becomes tight and an explosion crisis often occurs. On the other hand, if the dollar index falls below 90, it will indicate a flood of global liquidity, and inflation will inevitably occur, leading to asset bubbles. At present, the dollar index is already below 90, so the sharp rise in bulk commodity prices is only the beginning. There is a likelihood it will lead to an economic crisis that is even more severe than the one in 2008 as the worst case scenario. “Better safe than sorry,” as the saying goes. It is advisable for entrepreneurs and investors to be prepared so they don’t have to worry about the future.

 

孫 啓明
南京信息工程大学浜江学院 教授、北京郵電大学経済管理学院 教授、博士課程指導教員。中国西部研究・開発促進会 副会長、専門家委員会 執行主任。国家級海域使用論証 評価専門家、海南省国際島嶼観光シンクタンク連盟 専門家、海口市哲学社会科学シンクタンク 専門家等としても活動する。これまでに90本以上の論文を上梓。19の省級以上レベルのプロジェクトにおいて責任者を担当し、7冊の刊行物の編集長または副編集長を務め、10以上の企業委託プロジェクトを完成させた。直近の著作に経済自由化と大国のパワーゲームについてまとめた『经济转型与大国博弈(原文)』などがある。主な専門分野は地域産業協調開発。 // Sun Qiming, the Professor and PhD supervisor in the School of Economics and Management, Beijing University of Posts and Telecommunications, serves as the Dean of School of Economics and Trade, Haikou College of Economics, the Director of Research Center of Island Economy and Green Industry, Haikou College of Economics, and the Executive Deputy Director of Hainan Green Industry and Service Economy Research Base as part-time jobs; and he also serves as the Vice President of the Association for Promotion of West China Research and Development and the Executive Director of the Committee of Experts. He is the state-level expert on evaluation of sea use demonstration, expert of Hainan International Tourism Island Think Tank Union, and expert of Haikou Philosophy and Social Sciences Expert Bank, etc. He has published more than 90 papers, presided over 19 topics at or above the provincial and ministerial levels, acted as chief or deputy editor in 7 compiled works, and completed more than 10 projects entrusted by enterprises. His recent work is Economic Transition and Great-Power Game. His main research direction is the coordinated development of regional industries.