SYDNEY – These are tough times for many Australian industries that have benefited from the country’s trade ties with China due to the recent deterioration in ties between the two countries.

But for iron ore producers like Rio Tinto and BHP, these are glory days. Prices for future deliveries have reached record highs and mining company shares are reaching new highs. The Australian government is now considering a potential tax windfall that would help offset its largest annual budget deficit on record.

If market conditions could hardly be better for the miners, they could certainly get worse.

“The conditions are so good that they cannot continue,” said Morningstar analyst Mathew Hodge, noting that BHP and Rio Tinto are currently achieving a well above 100% annual return on their capital invested in the ore. of iron.

Supply and demand factors now working in favor of miners could change quickly, as ore shipments from other sources disrupted by the COVID-19 pandemic rebound and Chinese steelmakers, the miners’ best customers, under greater pressure to reduce production.

“There are specific features in the market right now,” said James McGlew, executive director of Argonaut brokerage in Perth. “It’s volatile, and that has led speculators to get into the commodity business (iron) as well.”

Iron ore futures hit a record high of $ 233.10 per tonne last week according to S&P Global Platts. Although they have recovered, prices remain significantly higher than the average of $ 160 per tonne seen earlier this year and are about double their level of a year ago.

The surge has raised concerns about market speculation with Chinese officials, who earlier this month cut tariffs on some steel inputs as a cooling measure.

After last week’s trading frenzy, the Dalian and Shanghai commodity exchanges increased margin requirements and trading fees for iron contracts, among other measures. These measures initially caused ore prices to drop to as low as $ 187 a tonne, but the China Iron and Steel Association, representing local producers, called on authorities to take the cut further. speculative activities.

On Tuesday, iron ore futures were back at around $ 215 a tonne.

Disruption to mines and ports from COVID-19, particularly in Brazil, Australia’s main rival in the international ore market, has been a key factor in the price spike. Analysts estimate that a continuing deficit of 18-20 million tonnes in the maritime iron market will persist until at least September.

It came at the same time that Chinese steelmakers are clamoring for ore to maintain record production levels through orders to support infrastructure development and manufacturing.

Crude steel production reached 97.85 million tonnes last month, up 15% from the previous year, even as Beijing tried to cut production to curb complaints from other countries about low-priced exports and the detrimental environmental profile of the sector.

Steel producers, like other industries, are now under pressure to come up with a roadmap to support Chinese President Xi Jinping’s pledge to achieve net zero carbon emissions by 2060.

The deterioration of political ties between China and Australia, linked to issues such as restrictions on Huawei technologies, blocked investment deals and investigations into the origins of the COVID pandemic, has thrown the spotlight on trade iron.

Over the past year, China has taken steps to block or curb imports of cotton, barley, beef, lobsters, timber and wine from Australia, but not iron. According to trade data, Australia supplies 60% of Chinese ore imports while China absorbs 70% of Australian exports.

“Even before iron ore prices started to move, it was an impossible trade war for China to win because China needs Australian iron ore and it is much more important to them than wine. or lobsters or whatever else we read, ”said Tom Smith. Head of the Department of Applied Finance at Macquarie University in Sydney.

In early May, Beijing suspended its activities within the framework of the China-Australia strategic economic dialogue in its latest retaliatory measure. Ore prices rose $ 39 per tonne over the next three trading days as speculative shipments could be affected.

“In the short term, we do not expect bilateral tensions to have a major impact on the iron ore trade as there is no immediate source of iron ore units to replace Australia.” UBS analyst Myles Allsop said in a report this month. “In the medium term, we expect China to invest less in Australia’s natural resource projects and accelerate its goal of reducing its dependence on imported non-captive iron ore.

On Tuesday, China’s National Development and Reform Commission said it would investigate trade in iron ore while encouraging domestic exploration and the development of new import channels.

In the meantime, Canberra expects A $ 30 billion ($ 23.38 billion) in fiscal windfall on record ore exports of $ 104 billion forecast for the year ending June 30.

“In a very difficult 2020, the Australian mining industry has fostered prosperity in Australia, making a substantial contribution to investment, exports, wages, jobs and government revenues,” said last week Tanya Constable, Managing Director of the Minerals Council of Australia.

Rio Tinto last year posted its best annual profits since 2011, with profits up 20% to A $ 12.45 billion. BHP saw its profits rise equally in the six months leading up to Dec.31 to A $ 6.04 billion, its highest half-yearly figure in seven years.

Smaller rival Fortescue Metals posted an even bigger gain, with half-year profits up 66% to A $ 4.08 billion. Analysts are bullish and momentum will continue when figures for the period up to June 30 are released in August.

Most believe, however, that prices must turn.

Citigroup analysts expect benchmark prices to average $ 174 per tonne year-round. At HSBC, analysts put this year’s average at $ 162 a tonne and next year’s average at $ 135.

A consensus of analysts polled by Bloomberg places prices at $ 124 per tonne by next March. But the official Australian government forecast, which tends to be conservative, calls for the ore to return to a long-term average of just $ 55 a tonne by then.