China-Australia trade war is heating up

The latest chapter in the ongoing saga between China and Australia has China slapping on a ban on the import of Australian coal! Those who were betting the trade war would subside are unfortunately wrong. Globalization has already been in jeopardy, and this certainly will not help resuscitate it.

Some analysts think that this makes the eventual ban on Australian Iron Ore an inevitability. That is a rational perspective, and actions are speaking very loudly right now. However, as we know, China has yet to produce such a ban because they rely all too much on Australian Iron Ore imports to satiate their demand for steel. As the single largest consumer of Iron Ore in the world, over 60% of their supply comes directly from Australia.

China has reportedly told coal traders and users to stop imports from Australia with immediate effect in a move that would choke a major trade channel for both countries, a major escalation of political tensions between the pair.

The term major escalation is apt in this situation, as it is a very significant move by China.

Commodity price reporting agencies S&P Global Platts and Argus, as well as other media outlets, reported in recent days hearing from unnamed sources that Beijing had given “verbal” instructions to some steel mills, power companies and coal traders to halt imports from Australia.

If the reports are accurate – there has been no official confirmation yet – it would constitute a serious deterioration in the relationship between Australia and its largest trading partner. Coal is one of the big three Australian commodity exports to China, coming in behind iron ore and liquefied natural gas (LNG).

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So far Beijing has effectively banned imports of Australian barley, placed restrictions on wine and meat, and discouraged students and others from travelling to Australia.

While these measures certainly are negative to the sectors involved, they are still relatively insignificant when compared to the overall trading relationship between Australia and China.

Australia is China’s top supplier of iron ore and coking coal, the two main ingredients used to make steel, while also being a major provider of LNG and thermal coal, used predominantly in power stations.

China is still the spending extravagantly on infrastructure. While this may be negative for some Australian exporters, it is a potential investment opportunity for suppliers of the raw materials required to make steel. Iron Ore is the key ingredient in steel manufacturing, and it would be very rational to buy stocks in Iron Ore mining companies. Certainly the market may be taking some notice of this, as Iron Ore prices are rising.

Picking the right stocks can be complex, and best outsourced to professionals, just like getting good trading ideas. The disagreement between China and Australia may not end with the ban on coal. It can certainly be a smart preemptive investment to buy Iron Ore stocks.

Australia supplies about 68% of China’s iron ore imports, and there is absolutely no way the rest of the world could make up for the shortfall if shipments were halted.

Given the reliance of the Chinese economy on steel as the key component of infrastructure, construction and manufacturing, an Australian ban on iron ore exports would have a far bigger impact on China than a Chinese ban on Australian coal imports has on Australia.

One stock that we believe is very opportune, given the size of the asset, the grade, and the fact that it is outside Australia, is Black Iron Inc (TSX:BKI). his stock trades at 12c a share on the TSX, and should be worth over $3.06 using very conservative prices of $100/t of 62% Iron Ore (i.e. mid-grade, not high grade like the deposit Black Iron has).

For those who want more information, the research report is available here.