A major train derailment in the Australian outback has halted a chunk of the country's iron ore exports to China. The incident exposed the fragility of miners' supply chains and their dependence on growth in China.
In a bid to clean its polluted air during the smoggy winter period and longer term, Beijing is upgrading the quality of its imported iron ore, the key component of the steel it needs to maintain its unprecedented economic growth. About 90 percent of Chinese steel capacity is expected to comply with new emission standards by 2025.
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And with this in mind, the rapacious Chinese steel sector is looking increasingly to South American suppliers of the world's most traded bulk commodity.
This process may be heightened after a major train accident in Australia — currently the largest supplier of lower grade iron ore to China — on Monday.
Andrew Mackenzie, chief executive of global mining giant Billiton said on Thursday it intends to meet its supply commitments to its customers after deliberately derailing a runaway iron ore train whose contents were bound for the Chinese market.
"We're continuing to mine, so we will have good stocks at the mines as soon as the rail opens and we're using port stops at the moment to ship, and we believe that with the recovery plan we have, which is within a week... we will not be letting down any of our customers," he told DW in an email.
BHP plans to use its reserves at the export hub of Port Hedland to maintain its port operations. While disruption is not expected to be significant for now as Chinese demand is now focused on low-grade iron ore, in the medium-term, the market is shifting toward higher grade ore. And as China accounts for half of the global steel output, trends in its huge industry tend to shape the global market.
Shifting sources of supply
China needs higher-quality, less polluting grades of iron ore and the Brazilian firm Vale, one of the world's big four iron ore miners, could benefit. The firm said it is looking to expand its flagship iron ore mine in Brazil to feed Chinese demand.
Another Australian mining giant, Fortescue, said this week trade tensions and slowing economic growth in China have not dampened demand for iron ore, but warned that the trade row between the US and China could hit the market.
Fortescue said the company was also experiencing a significant increase in sales to markets outside of China, which now make up about 10 percent of sales. The company is also aiming to start producing higher-grade iron ore from December.
Steel production in China will peak in 2018 and then fall in 2019 as local demand drops, according to forecasts from the Australian government. This concurs with an expected 2-percent drop in 2019 by ratings agency S&P Global Ratings and Morgan Stanley, which forecast China's overall iron ore demand to peak this year at 1.28 billion tons and shrink by 180 million tons by 2023.