Boom: the demand for iron ore

Peter Drysdale looks at African competition in China’s market for iron ore in East Asia Forum.

The boom in resource prices, fuelled by China’s surging industrialisation and steel demand over the past couple of decades, has lifted Australia’s terms of trade to a 100-year high.

Resource exporters around the world have been enjoying good times. Australia’s terms of trade are 65 per cent above the average twentieth-century level and 85 per cent above the trend seen in the twentieth century, had that continued.

As a result, Australian gross domestic product in nominal terms is about 13 per cent higher than it would have been without these relative price changes. What goes up, of course, must also come down. A gigantic global supply response to booming resource prices is already under way.

Take the case of iron ore, Australia’s largest export commodity, the price of which leapt from just over $12.68 per tonne in 2001 to $187.18 per tonne in February 2011.

Forecasts for growth of Chinese iron ore demand (and India’s attempt to switch from exporting iron ore to supplying growing domestic demand from its own steel industry) have led to a scramble to expand and capitalise on current high prices.

Suppliers all around the world are trying to cash in on these high ore prices. The established suppliers in Australia and Brazil have big expansion plans just to keep up with continuing growth in the demand from China’s steel mills, and new suppliers are now scrambling to enter the market. 

Provided by Australian National University