Australia’s Commodity Dominance Ending — Is Gina about to Go Broke?

Australia’s Commodity Dominance Ending — Is Gina about to Go Broke?

Dear Reader,

Clash of the dynasties’, WAtoday declared yesterday.

Billions of dollars of iron ore at stake…’ it goes on.

What gives?

Basically, two super-rich people are fighting over a particular tenement inside the Hope Downs iron ore riches out in the Pilbara.

Supposedly both parties have spent about $2 million in legal fees fighting over their stake.

But what’s a few million when you’ve got tens of billions up your sleeve to play with?

More to the point, what if Australia’s future didn’t rest on its iron ore riches?

Could Gina be spending millions on something that might not be worth it in the long run?

What if our future has nothing to do with what’s in the ground…but what we put above it?

I know, sounds crazy. But I’m convinced our commodity dominance may be reaching an end.

Our national wealth didn’t always come from what we dug out of the ground…

Iron ore remains king…for now

It wasn’t always like this.

Nearly a 100 years ago — in between the two World Wars and during a depression — exports of iron ore were banned.

Back then, our known geology of iron ore was limited. Broken Hill Property Company (today’s BHP Group Ltd [ASX:BHP]) ‘held leases over virtually all of the suitable and accessible deposits of iron ore in Australia’ says book The Second Rush.

It was thought that the supply of iron ore was limited. Therefore, there was an export embargo on it as it was considered a strategic metal for our steelmakers. A resource that had to be protected for Australians only.

Lang Hancock’s discovery of the Hammersley Basin in the 1950s changed all that. What Hancock unearthed meant we could literally supply the world with iron ore for decades.

And so we did…

Arguably most of what holds up the cities in China was once under the Pilbara.

However, perhaps the days of being China’s source of iron ore are numbered.

Tensions are getting rough between Australia and China. The Middle Kingdom’s state-owned media is increasingly combative about Aussie-produced products we sell to them.

And now, the rhetoric around iron ore is firmly in the crosshairs of friendly Chinese Communist Party (CCP) media sources.

The South China Morning Post has said that Brazilian mine Vale is capable of shipping even more iron ore to China than any Australian cargo ship.

Which is true. Cargo ships from Vale can carry more than 100,000 tonnes of iron ore from port to port than any Australian iron ore ship.

The problem, however, is since the dam tailing walls collapsing in January 2019 and now the ongoing problems with the coronavirus in the area, Vale is still yet to get back to pre-2019 production levels — let alone ship more iron ore than Australia does.

Of course, there’s all the talk that Australia has a new iron ore competitor out in Africa.

Word has it that while the Chinese government is excited for the iron ore mine under development in Guinea, commodities intelligence firm CRU has said there’s no ‘material’ chance Guinea would ever ship any ore to China…

The reality is China imports a whopping 62% of its iron from us. Brazil is a distant second, with 21%.

There’s no one immediately ready that can match our supply or iron ore, let alone beat it.

Of course, it won’t always be this way.

Given the increasing tensions between Australia and the Middle Kingdom, there’s little doubt the Middle Kingdom is keen to find a new source of red rocks. China has certainly bought up a lot of Africa to ensure a long-term supply of commodities…iron ore just isn’t one of them yet.

We’ve bought ourselves five years to begin the transformation.

Maybe that’s all we need…

Australia’s greatest decade

I reckon the 2020s will be Australia’s greatest decade.

Although declaring that is probably a bit on the nose today, given we just confirmed our first recession in almost 30 years this week.

But there’s reason why I say this.

While many of us didn’t get as rich as Gina Rinehart did from selling iron ore to China, the rise of Middle Kingdom did benefit us in other ways.

Nonetheless in the last decade, the relationship with China has become estranged. We’ve booted them out of key infrastructure along the way.

As things get worse between the two nations, our government will have no choice but to look to rebuild the Aussie economy in other ways.

This time around, simply digging up rocks and selling them to the largest bulk buyer we can find isn’t the answer.

Already we’re seeing news of the Federal Government looking to international businesses to try and woo them to our shores. You can bet these firms will be offered all sorts of tax breaks and incentives to lure them to our shores.

The Australian reported this morning that pollies are hunting big $250-million-plus firms. Cleverly calling it the ‘JobMaker’ program.

Furthermore, the targeted companies are likely to come from our allies within in the ‘Five Eyes’.

The economic reliance of what’s underground is coming to an end. We’re about to see the next few decades rely on what’s above ground.

Perhaps Gina might go broke after all.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia

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