China will buy less Australian iron ore because of US defence ties, Commonwealth Bank warns

China is already moving to buy less Australian iron ore in retaliation for its ties to the United States — jeopardising hundreds of millions of dollars in Federal Government revenue, the Commonwealth Bank has warned.

Australia’s biggest trading partner, China, will end up buying a lot less of Australia’s biggest export for strategic reasons, geo-economist Madison Cartwright says, with alternative shipments of the key commodity used to make steel already arriving from Africa.

“Australia is both a key supplier of iron ore — a critical economic vulnerability for China — as well as a key ally of the United States in the region,” he said.

“For China, these two facts raise serious economic security concerns. As a result, the Chinese government has worked, over time, to reduce its dependence on Australian iron ore.”

This was expected to occur regardless of whether China invaded Taiwan, potentially forcing Australia to side with the US.

“China’s mitigation strategies will continue, even in the absence of a conflict. The result will be downward pressure of iron ore prices,” Mr Cartwright said.

Rio Tinto’s Simandou iron ore mine at Guinea in West Africa became operational in November last year with the first shipments arriving in China last month.

The state-owned China Mineral Resources Group was also established in 2022 to centralise iron ore imports and give the Chinese Government more leverage in dealing with global miners.

This could potentially enable China to reduce its reliance Australia, which supplies 80 per cent of its iron ore, as it also disentangles its economy from the United States.

This decoupling would give China the power to impose the kind of trade coercion on Australia that Xi Jinping’s Communist Government wasn’t able to inflict in 2020 when 200 per cent tariffs were imposed on a series of imports, from wine to timber, in retaliation at calls for a COVID inquiry.

“China is leveraging its position as the world’s largest iron ore importer, both for Australia and globally, to caution Australia against jeopardising China’s interests,” Mr Cartwright said.

“Economic coercion is used to signal that strong alignment with the United States is not without costs.

“In the new era of deglobalisation, no trade relationship can be taken for granted.”

Iron ore prices have since January fallen from $US108 a tonne to $US102 a tonne.

Treasury estimates every $US10 fall in the spot price of iron ore would wipe $400 million from Federal Government revenue in 2025-26.

The Commonwealth Bank is now expecting iron ore prices to fall as low as $US90 a tonne by the end of 2026 on oversupply concerns, potentially taking away half a billion dollars in tax revenue during a time of Budget deficits and spending pressures.

Nationals senator Matt Canavan, a former resources minister and economist, said any weakening of Chinese demand for Australian iron ore would be a fiscal challenge for the Federal Government, that he argued had failed to find alternative markets in south-east Asia.

“It’s massive. Across all resources, half our corporate tax now comes from mining and resources - a big chunk of that is iron ore,” he told The Nightly.

“There will be a price impact from more supply coming from Africa and that’s going to mean lower tax revenue.

“There’s no doubt there’s lots of reserves of iron ore around the world so, this is a long-term threat to our industry.”

Australia still had a trade surplus in December with the 1 per cent monthly increase driven by a 3 per cent increase in the value of iron ore exports, which partially unwound a 10.7 per cent drop in November.

“The pattern is consistent with China’s contradictory trade dynamics — iron ore imports have hit record highs even as steel demand and output have declined, with port stockpiles rising through mid-December,” Moody’s head of Australian economics Sunny Kim Nguyen said.

The Australian dollar last month climbed above 70 US cents for the first time in three years which could potentially hit government revenue given a stronger currency can curtail export volumes.