US-China Trade war: Beijing to cut steel output; shares fall on Trump’s tariff threats

Tectonic shifts in economic policy across two hemispheres are now threatening to swamp Australian businesses.

Two factors that have underpinned Australia’s global trade prospects — our iron ore exports to China and the rules-based trade order once championed by the US — are fracturing.

China revealed its plans to restructure its steel industry by cutting output — a move that has already hit the shares of Australian miners and threatens company tax receipts critical to the national Budget.

The directive was announced at the National People’s Congress at the same time that US President Donald Trump was delivering a barnstorming State of the Union address that ratcheted up tariff pressure on America’s major trading partners.

Those measures included across-the-board 20 per cent tariffs imposed on Chinese products, the latest threat to an Asian economy already weighed down by a prolonged real estate slump and sluggish consumer spending and private business investment. Those tariffs would have likely accelerated Beijing’s move to boost domestic demand.

Huw McKay, former chief economist at BHP and a current fellow at the Crawford Centre at Australian National University, said that the use of the term “restructuring” was highly significant and a change from usual practice at Beijing’s annual economic gathering.

“They talk about steel output every year but haven’t talked about restructuring, and the link to profitability for some time,” Mr McKay said. “Restructuring means taking actual capacity out.”

China produces more than one billion tonnes of steel annually across hundreds of mills but profitability has increasingly been squeezed by a severe decline in construction demand, with the country’s manufacturing, such as car production and ship building, a bright spot.

While details of the restructuring program were light, markets were speculating a potential reduction of as much as 50 million tonnes. That caused the iron ore price to drop 1.3 per cent to below $US100 per tonne in Singapore trade.

The announcement from China comes as it looks to rebalance its economy in the face of Mr Trump’s US tariffs.

‘I love you too’

In Washington, the President’s much-anticipated speech to Congress contained an ominous warning on trade.

From April 2 the US will impose tariffs on agricultural imports, he said. There “may be a little bit of an adjustment period” but “to our farmers, have a lot of fun. I love you too. I love you too. It’s all going to happen.

Mr Trump did not declare that Australian beef, wheat or other farm-grown commodities would be affected. So far Mexico, Canada and China remain the key targets. But as one of the world’s most-efficient agricultural producers, Australian policymakers hope Trump’s trade war can be contained as much as possible.

There remain fears, though, the president’s unpredictability could trigger an escalation at any time. Even if Australian farmers avoid tariffs and miners bounce back from today’s announcements out of Beijing, analysts still fear the Australian economy will suffer anyway from a tariff-induced global slow down.

Those concerns emerged on the share market Wednesday, when the S&P/ASX 200 index fell 0.7 per cent following confirmation of the tariffs against its closest trading partners. In his defiant address to Congress, Mr Trump said he had wanted the tariffs to start April 1, but delayed them a day out of superstition.

“Whatever they tariff us, we tariff them. Whatever they tax us, we tax them,” Mr Trump said. He sought to ease concerns about price increases, saying, “There’ll be a little disturbance, but we’re OK with that. It won’t be much.”

One of the biggest losers was Treasury Wine Estates, which sells a lot of wine to China and the US. Its shares fell 5 per cent. Just on Monday the Melbourne-based company said it had bought a winery in rural China for $18 million under a strategy to expand in the country. News Corporation, which owns US media outlets and the New York-based HarperCollins book publisher, fell 2 per cent. So too did BlueScope Steel, which sells steel to the Americans.

Another gauge of Australia’s trading success, the currency, is not faring well. In the past few days the dollar fell below 50 British pence for the first time since 2020, driving up the cost of travel to the UK. An all-day train ticket covering zone 1 and 2 in London now costs around $18.

Prices for Australians are also rising in the US. Over the past two weeks the dollar has lost a cent versus the USD to hit 62.6 US cents Wednesday. The last period the dollar traded this low was in 2022. The cheapest rooms at the Marriott Marquis hotel on New York’s Times Square this weekend are $958 a night.

China call hits miners, budget

In a similar manner to Mr Trump, Chinese leader Xi Jinping also used Beijing’s event as a show of intent with a number of economic moves, including further cuts to steel output in the face of falling domestic demand.

Mr McKay said that China’s restructuring process would most likely entail larger, profitable mills taking out smaller, less efficient ones which would concentrate production around manufacturing centres.

Bottom tier mills were a key source of demand for producers of lower grade iron ore, such as Australian miners Fortescue and Mineral Resources.

“Companies that don’t have the higher quality product are probably going to see steeper discounts under these circumstances.”

China’s best mills, who were purchasers of premium, 62 per cent iron ore by weight shipments would continue to favour those products.

“The Rio Tintos, the BHPs and the Vales of the world will be fine,” Mr McKay said. “In the longer run, a company like BHP is only dealing with the best mills and Vale will be the biggest beneficiary with their high grade ore.”

Shares in Fortescue Metals Group fell 1.4 per cent to $15.93. BHP and Rio Tinto, which aren’t as dependent on China, posted small gains. Another iron ore miner, Mineral Resources, fell 1.86 per cent.

The pullback would not just hit the earnings of the big miners.

Heading toward an election the Australian budget has been propped up by mining company tax receipts based an iron price that has remained above $US100 per tonne, against Treasury forecasts of around $US65 per tonne. That has delivered “revenue upgrades” which have supported Government spending.

Mr McKay said that a restructuring of the steel industry in China would ultimately hit the budget bottom line.

“Australian tax receipts decline as the price goes down,” Mr McKay said.

“We’re not going to be increasing production out of Australia under these circumstances, rather the majors will be grinding out a little bit of productivity and someone like a Mineral Resources is not going to come back with increased swing tonnes.

“So I think declining tax revenue is a pretty obvious directional theme.”