Australia seems to be China’s favourite no longer

For about ten unbelievable years from around 2004 through to about now Australia has been China’s favourite place to get its resource materials. This huge pipe of income flowing into Australia has kept us happy and growing even while the rest of the world struggled with, and is still struggling with, the afterglow of the Global Financial Crisis.

But as South America and Africa start to come on line in useful production quantities China is flicking its eyes away from Australia more and more for the resources it needs.

The reality is that labour costs and start up costs in Australia have just become too much of a hurdle. Even with the longer sea route distances just about every resource material Australia has on offer, with the possible exception of LNG, is cheaper to get from South America or Africa. Mainly due to the massively lower labour costs in those countries.

This, along with China’s significant growth slowdown over the last 14 months, has seen the price of iron ore slide from about $180 a tonne down to around US$120. Today iron ore hit a seven-month low of US$113 and this is not expected to be the ‘bottom’ due to the falling demand for steel by China.

Aluminium, usually a strong and reliable resource, has fallen over 30 percent in the last two years. This for a metal that back in 2011 was forecast to improve by 50 percent by late-2013. Okay, it’s not late-2013 yet, but does anyone seriously expect Aluminium to improve by 80 percent over the next six months?

Next coal, another of our big exports, has dropped from up around US$145 tonne (Australian Thermal Coal) at the start of 2011 down to a little over US$90 per tonne—a fall of over 35 percent.

NickelGraphFinally Nickel, once the darling resource of the West. Just to make the point on Nickel I have included the graph from the LME site. Not a good graph. The price of nickel is clearly going in the wrong direction.

Nickel is down almost 50 percent since March 2011.

If China gets serious about switching its gaze towards South America and Africa for resources, combined with their internal growth slowdown, then I am not seeing a great outcome for Australia in this.

But who knows? The government may have something up its sleeve to turn this around.

I should point out that I am neither an economist nor an optimist.

BarryMark