Digging up the dirt: Australia and China's fragile mining relationship15 March 2012 Sarah Blackman
China's demands for minerals and Australia's abundant supplies have formed the backbone of a strong partnership. But bonds may be about to break, as Chinese growth slows and Australia looks to secure investment interest from elsewhere. Sarah Blackman investigates.
China's demand for metals and minerals once helped Australia cling on to a stable economy while other nations slipped into recession, but as growth slows in the East Asian state, the country may be about to lose its grip.
Australia is China's biggest and main trading partner, with minerals - particularly iron ore and coal - representing 67.3% of total exports to the country in 2010. Furthermore, over the past five years, the value of these mining exports has increased from A$13.2bn in 2006-07 to A$49.9bn between 2010 and 2011, according to data from Australia's Bureau of Resources for Energy Economics (BREE).
For a long time, Australia has depended on China's hunger for mineral resources to feed its own finances, but after it cut its annual growth target to below 8% this month, for the first time in a decade, the world's second largest economy is expected to lose its appetite.
Rise and fall of the Chinese-driven mining boom
This time last year, Port Hedland, the highest tonnage port in Australia, could barely keep pace with Chinese demand.
Its capacity had tripled since 2006, with iron ore, copper and other minerals making up the majority of export goods bound for the Asian country. In addition, according to Lindsay Copeman, acting chief executive of the Port Hedland Port Authority who spoke to Time Magazine in June 2011, capacity was expected to double again by 2016.
Australia was reaping the benefits of the Chinese-driven mining boom and so were its major mining conglomerates, including Fortescue Metals Groups, Rio Tinto, Xstrata and BHP Billiton - which, in the fiscal year 2010-11, generated 28% of its total sales in China.
But the boom wasn't to last and as Chinese Premier Wen Jiabao announced this month that China's economy would grow by 7.5% in 2012, down from 8% last year, the mood of Australia's export market turned sombre. Speaking at the National People's Congress in Beijing, Jiabao said exports and imports would rise by only 10% this year, 2012, down on growth of 20% seen last year.
The figure matched expectations, however, with BREE predicting in its Resources and Energy Quarterly report, published in December, that China's growth would ease after the country raised its interest rates five times in the past year to help reduce inflation.
The world's largest mining companies remained optimistic about demand growth for commodities in September 2011, but cautioned that a slowdown in China's economy is among the biggest risks they face.
In its annual report BHP noted that weaker Chinese growth would dent its earnings. "Sales into China generated $20.3bn, or 28.2% of our revenue in the year ended 30 June 2011. A slowing in China's economic growth could result in lower prices and demand for our products and negatively impact our results," the report said.
Political complications confuse matters
It has been widely anticipated that Australia's relationship with China is a bubble waiting to be burst. In October 2010 Prime Minister Julia Gillard spoke about the potential dangers of Australia's mining industry over relying on Chinese demand.
Speaking to the Queensland Media Club she warned: "If the demand for raw materials fell away, Australia would only remain strong if economic growth was broad based - encompassing services, manufacturing and agriculture."
Gillard's government's action to station US troops in Australia while continuing dependence on exports to China, however, has been strongly viewed with suspicion by its trading partner and her people.
In a survey conducted in 2011 by the Sydney-based Lowy Institute for International Policy on 1,002 Australians, 57% of respondents said Australia invests too heavily in Chinese resources, while almost half the participants saw China as a looming defence threat.
Sino-American relations have become strategic over the years, which raises the question - what if Australia is made to choose between China's trade and the US's security? But maybe it doesn't have to.
Despite growing fears of a slowdown in China's demand for Australian resources, some experts believe the relationship between the two countries isn't over just yet. On hearing the news about China's new growth target, Australian foreign minister Bob Carr told Xinhua that the move was fiscally responsible.
"I think everyone in Australia concerned with the Chinese relationship was aware that their growth, once over 10% per annum, would come back to the level of a mature economy and that is around about 8 to 7%. It's still very high and as the Chinese economy matures its growth would come back," Carr said.
CFA Institute Society of Sydney Qian Jingmin also told the paper that the resources sector is well-placed to absorb these kinds of shifts, and the impact won't be felt too harshly.
Expanding their reach to secure the future
Although experts remain undeterred by China growth fears, Australia is looking to secure interest in its mining assets from other countries, just to be on the safe side.
According to BREE, Resources and Energy Quarterly report India's thermal coal imports from Australia are forecast to increase by 18% this year, compared to 2011, to a total of 92 million tons.
But, demand for mining commodities in the Organisation for Economic Co-operation and Development (OECD) is expected to be led by Japan in response to the rebuilding of infrastructure following the March 2011 earthquakes and tsunami.
China is also looking to slash is reliance on Australia's resources and has announced plans to secure 40% of its iron ore imports from other overseas mines by 2015. The country plans to build two or three mining groups with the capacity to import 100 million tons a year of ore during this period.
The country, as with other Asian countries, is looking to diversify their investments into mining regions in Africa and Latin America, and has already injected millions into Canadian mining companies seeking to build new mines.
Whatever the outcome for Australia and China's relationship, it seems, for now, they can't live without each other. China's growth may be slowing, but it is still expected to continue its major role as an importer and exporter, and Australia, with its growing coal and iron pre-production, may be too strong a supplier to ignore.