Australian exporters of iron ore and coal are enjoying healthy sales to China thanks to Beijing's economic stimulus plan, but they could create an oversupply if the economy slows, Australia's Trade Minister Simon Crean told reporters on Friday.
"I think what's important is the stimulus packages that the Chinese government has implemented -- some A$800 billion worth, going signficantly into infrastructure -- is clearly going to be a benefit to Australia's resource industry," Crean said during a trip to Shanghai.
"And it's true that it might create, in the future, a circumstance of oversupply, but that's only if the domestic economic activity slows."
China imported record volumes of iron ore in each of the last three months despite a slump in its steel exports, and it imported large amounts of coal although it has vast reserves of its own and demand for the dirty fossil fuel was on the slide.
Australia is China's top iron ore supplier and the second-largest source of coal imports after Vietnam. Australia's coal sales to China soared in February and March as world demand slumped and Chinese power generators, failing to strike a domestic supply deal, turned to foreign sources.
Anthony Loo, the China managing director of global mining giant Rio Tinto, who was accompanying Crean, seconded the minister's assertion that China's stimulus package was the source of demand for iron ore.
"In the past two months, March and April, steel production recovered. It should be the effect of the 4 trillion yuan ($587 billion) stimulus plan. We hope to see demand continue, but it's hard to extrapolate the long term trend from a couple of months."
Loo said although iron ore prices had fallen from last year's peak, they had stabilised at a low level and the market would favour the cheapest available supplies, pushing high-cost producers out of business.
"Our production cost is probably the lowest in the world, or at least in Australia. Therefore we are still competitive when the market is sluggish."
He declined to comment on this year's benchmark iron ore pricing negotiation, in which Rio and its rival BHP Billiton face Chinese demands for a 30-40 percent cut in prices.
The slump in the iron ore market and the sharply differing interpretations of China's steel revival -- either causing disastrous oversupply or signalling the return of healthy growth -- may make it hard for the miners and steelmakers to agree on a price.
"Previously the rule is that if there is no agreement by the end of June, the talks would be abandoned and people would operate on the market price. But what is the market price? It's never happened in the past 20 years," Loo said.
Some market participants have speculated that the benchmark pricing system could give way to a system of indexed prices.
But Loo said that was not what parties to the talks wanted.
"If you support index pricing, why would you still be in the talks? The talks are about the reference price."
Australia is seeking access to direct investment in China, its largest trade partner, as the two countries are negotiating a Free Trade Agreement.
Source: Reuters
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