Two bits of bulk shipping-related news this week reveals how the world’s relationship with China is very much quid pro quo.
China manufactures everything. Or just about. But the problem with making everything is that you need masses of raw materials with which to make it.
This is where China needs the world, and nowhere is the country more dependent on foreign suppliers than in the sourcing of iron ore for its insatiable manufacturing machine.
About 60 percent of China’s annual consumption of iron ore is imported, most of it from the big three suppliers, Vale, BHP Billiton and Rio Tinto. The mainland does have large domestic reserves of iron ore but its quality is low grade and it is expensive to mine.
However, imports of ore are also becoming more expensive, mainly because the foreign suppliers have put the price up by 100 percent. This has annoyed the China Iron and Steel Association (CISA) that traditionally negotiated annual benchmark prices with the big three. The annual contracts were abandoned last month in favour of quarterly pricing, which makes sense considering the volatility of iron ore’s supply and demand.
CISA has been throwing its toys out of the cot and calling for steel mills to boycott the suppliers, and the suppliers have responded with threats to cut off supply.
If a boycott/cut-off ever happens, it won’t last for long. Even with strong iron ore consumption in Korea and Japan, the giant mining companies need the revenue from China’s demand to make their massive investments economically viable.
What China should learn to accept, however, is that when the supply of ore is tight, the price will go up. As the world recovers from the recession, the demand for iron ore is increasing, especially in Korea and Japan and guess what – that’s right, the price is going up.
The second example of how China’s fortunes are inextricably tied in with the rest of the world is in the import of grain. More specifically in its decision to open its markets to the importation of US corn.
No matter how fast China’s agricultural output grows, it is constantly outpaced by demand. To make up for the shortfall the mainland yesterday bought 115,000 tonnes of corn from the US.
The USDA expects China to become a long-term importer of its corn, which is great news for US farmers and for bulk carriers.
It is also great news for the world, and evidence that despite the posturing over the yuan revaluation and protectionist threats and counter-threats, China’s emergence as a super power is not so much a threat as a smorgasbord of opportunity.