Iron ore price: China pays Australian iron ore in yuan

The US dollar could be a thing of the past when it comes to global trade, as the Australian iron ore industry welcomes this new mode of payment.

A ship carrying Australian iron ore docked in China’s Shandong province last week. As Australia’s biggest buyer, there’s nothing unusual about that. What was remarkable was the way this iron had been paid for.

The transaction had been in Chinese yuan. No US dollars.

Beijing’s control world times saw this as a small – but significant – victory.

“Australian businesses understand that they cannot always play by their own rules in business partnerships with Chinese customers, their largest global buyer, and the use of the Chinese yuan for trade is a positive change,” said Chen Hong, director of Australian studies at East China Normal University. as told.

Beijing continues its efforts to place its currency, the yuan, on the world stage as an important trading currency. But, since being listed by the International Monetary Fund as an international reserve asset in 2016, it has failed to make progress.

Its use to pay for the cargo of iron ore carrier BHP Vittoria two weeks after it left Port Hedland in Western Australia may represent the economy and politics of the moment more than any long-term trend.

“The Russians force European countries to pay for their gas in rubles. Australia has taken a good step in offering China an alternative to US dollar payments for iron ore,” said the Macquarie University economist. Doctor Lurion De Mello.

“Better to offer than to be forced.”

Market forces

Despite rising tensions, trade with China accounted for 29% of Australia’s total imports and exports in 2020. It reached record highs in 2021.

This makes China three times more valuable than Australia’s second largest market, the United States.

And this is not the first time that mining giant BHP has accepted payment in yuan.

In May 2020, he delivered a shipment of Brazilian iron ore to Chinese group Baowu Steel – the world’s largest steelmaker.

“The fear that China is sourcing iron ore from Brazil and Peru is a real threat,” Dr De Melo said.

“BHP’s move with iron ore is certainly a good move.”

It wasn’t the only one either. At the same time, Baowu said it had struck similar deals with iron ore companies Vale of Brazil and Australia’s Rio Tinto and Fortescue Metals Group.

“Australia’s iron ore is the best in the world, and China will depend on it for many decades,” he said.

“The US dollar has dominated global commodity trading for far too long. We need alternative currencies to trade.

It’s the economy, silly

“The launch of the yuan-based iron ore trade marks an important step for the Australian company to get closer to the Chinese market, while balancing the possible risks and uncertainties of the US dollar inflamed by high US inflation,” said the world timesdeclared.

The US dollar is a floating currency. This means that its value is determined by the performance of the US economy, comparative global interest rates and other market forces.

The Chinese yuan is pegged. The central government in Beijing arbitrarily set its value at around one-seventh that of the US dollar to make its exports more attractive.

In bullish conditions, the US dollar looks very attractive.

In a bear market – with inflation and rising interest rates – pegged currencies seem more stable.

“With global inflation well underway, all currencies depreciated against the US dollar,” Dr De Mello said.

“The dollar should continue to rise as interest rates rise. The latest US inflation data confirms this.

This makes the US dollar more expensive for countries – and multinational corporations – to use as currency.

“The high level of the US dollar has a profound impact on countries that import a lot of minerals like iron ore,” added Dr De Mello.

A matter of value

Beijing has made no secret of its desire to topple the US dollar with its yuan as the world’s reserve currency – the payment of choice in international trade.

Last month, he brought together Brazil, Russia, India and South Africa – the BRICS group – to plan such a new global currency based on pooling their liquidity.

Beijing also said it hoped to build a global yuan swap reserve with Hong Kong and Singapore to facilitate its availability for large international transactions.

But the artificially pegged nature of many of these currencies remains a major hurdle. And the yuan is not freely convertible into other currencies: the Chinese Communist Party is not willing to surrender control of its value to market forces.

The US dollar, however, is freely convertible. This, and being linked to a robust economy and its long stable history, has seen it integrated into global financial markets.

But its appeal has slowly waned over the past few decades.

And the yuan has so far failed to take advantage of it. Only a quarter of the transfer went to Beijing, which now holds around 2.9% of global cash reserves.

International central banks have instead opted to diversify their options through non-traditional reserve currencies such as the Australian dollar, South Korean won and Swedish krona.

The European euro is the world’s second largest currency – and far behind the dollar.

The US Federal Reserve is not worried about the immediate future.

“No currency replicates the characteristics of the US dollar as a store of value, unit of account and medium of exchange,” recently Federal Reserve report read.

“Furthermore, US assets are considered safe and liquid and have weathered the effects of global shocks.”

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