What China’s Iron Ore Demand Means for the Aussie

If you were too busy finishing the Hunger Games novels in preparation for the upcoming movie release, then you may have missed out on all the action yesterday. Interestingly, despite the relatively upbeat RBA minutes, the Australian dollar took an arrow to the chest, falling about 1.1% versus the dollar yesterday.

The culprit? Concerns about Chinese demand!

According to BHP Billiton, an Australian mining giant, Chinese demand for iron ore is expected to drop down to single digit growth, as the world’s second largest economy continues to cool off.

Take note that China has been drawing iron ore from all over the world in order to keep its steel mills churning. To put things into perspective, China has accounted for a massive 60% of global iron ore demand, with orders rising over 10% annually for the past 8 years.

And where has China normally gone shopping to satisfy its hungry belly? That’s right – Australia!

Remember that China is Australia’s number one trading buddy when it comes to both exports and imports. Based on 2010 data, more than 25% of Australia’s exports go to China while 18.7% of its imports come from the Asian giant. And, as an economy that relies heavily on its natural resources, commodity exports comprise a huge chunk of Australia’s GDP.

Due to this relationship, the Australian economy is extra sensitive to demand from China, just as Big Pippin is secretly affected by the ups and downs in Justin Bieber’s music career. As you’ve probably noticed recently, the Aussie suffered a huge hit when China cut its 2012 GDP forecast to its eight-year low of 7.5% just a few weeks ago.

So naturally, news of another projected slowdown in China weighed heavily on the Australian dollar, making it one of the worst performing currencies yesterday. Coupling yesterday’s news with the fact that recent data from both Australia and China hasn’t exactly been too encouraging, it’s no surprise the Aussie took a dip in the deep end yesterday.

Despite the projected slowdown in China’s iron ore needs, mining companies in Australia remain confident that demand will rebound sooner or later. In fact, BHP is still sticking with its $10 billion iron ore expansion plan while Rio Tinto, another top Australian mining company, plans to increase its annual iron ore production from 225 million tons to 283 million tons next year.

Economic analysts also project that even single-digit growth in iron ore demand from China should be enough to support the mining companies’ expansion plans. After all, growth is still growth, right?

Although Chinese ore demand is expected to increase at a slower pace, bear in mind that this would still translate to consistent growth in absolute terms since the base figure would be steadily rising. Now that might be enough to keep the Australian dollar afloat!