As a result of the pandemic, global economic growth has turned from positive to negative in 2020. In particular, the extent of the recession in major economies has been relatively significant. With the successful development of the vaccine and the full-scale promotion of vaccination, countries are confident that the economy will rebound dramatically next year. For example, the U.S. Federal Reserve expects the GDP to be -2.4% in 2020 and the median GDP growth at the end of 2021 to be 4.2%. International financial institutions broadly believe that China can achieve growth of about 2% this year and 8% next year. The International Monetary Fund (IMF) expects the global economy to shrink by 4.4% this year and grow by 5.2% in 2021.

In March, the U.S. Federal Reserve adjusted downward the target range for the federal funds rate by 100 basis points to zero. Most advanced countries are now keeping interest rates at zero or negative. At its December 2020 meeting, the Fed committed to no interest rate increase for three years, and it is believed that all major economies will not raise interest rates for the next three years or so.

International financial institutions have ignored inflation in projecting next year’s economic growth. The Food and Agriculture Organization of the United Nations (FAO) expects a worldwide food shortage, with food prices expected to remain high. The global crude oil price is expected to move up above US$40 per barrel, and metal prices for steel, copper and aluminum are forecasted to hit record highs. The prices of industrial products are also projected to continue to rise. Inflation is expected to occur over the next three years. Not only will commodity prices rise, but with the recovery of the economy, low interest rates will also affect asset prices. Higher housing prices are a likely possibility in most parts of the world’s developed economies.

China’s economy could have developed more robustly but because of its assertiveness towards the Western countries, there are five problems that will affect its economic development in 2021. The first is the impact of power outages on the economy; second, the rise in the price of scrap metals will have an impact on the entire industry; third, the restriction of chip technology by the West; fourth, the relocation of the industrial chain; and fifth, the disruption of the industrial chain.

Earlier this month, FAW-Volkswagen and Shanghai Volkswagen shut down production, reportedly due to chip shortages. I reckon it has something to do with the increase in steel prices. The surge in steel prices will lead to a significant increase in the production cost for automakers, reducing profits and even incurring losses. As it is impossible to increase the price of cars, it is better to stop production. The sharp increase in prices of steel will also directly increase costs for the real estate sector that will have to bear the tremendous pressure of rising costs.

In December, there were large-scale power outages in Hunan, Jiangxi and Zhejiang, and later in Beijing, Shanghai and Guangdong. The main reason for the power outages was environmental concerns as the emissions of sulfur, arsenic and other substances from domestic coal-burning were unlikely to meet China’s carbon-neutrality emission goal. After the deterioration of the relationship between China and Australia, the high-quality coal from Australia cannot be delivered to the power stations and the power plants can only shut down. In addition, this year is the last year of the 13th Five-Year Plan, and the only way to achieve the task of energy saving and emission reduction is to pull the plug and impose restrictions on electricity. This is perhaps the easiest problem to solve, and can be resolved by mid to late January of next year.

With the onset of the U.S.-China trade war, relations between the two countries have deteriorated irreversibly. The expansion of the U.S. sanctions list will break the Chinese industrial chain. Meanwhile, Japan and other countries are subsidizing the relocation of industrial chains out of China, and factors such as taxes and costs affect the relocation of Chinese enterprises to Southeast Asia and India.

Since April, China and Australia have been in a trade spat, with China boycotting Australian coal and red wine. Iron ore futures on China’s Dalian Commodity Exchange (DCE) have soared from a low of 511 yuan (US$78) per ton in May to over 1,100 yuan per ton now. Even the Platts iron ore index, or IODEX, 62% Fe, which is the benchmark of the spot price of physical iron ore, has skyrocketed by over 60% and is now firmly above US$160 per ton. China’s steel production accounts for roughly half of the world’s output, and China is the largest importer of iron ore. The world’s iron ore is monopolized by the world’s three biggest mining companies: Brazilian miner Vale, Australia’s BHP Billiton and Britain-Australia’s Rio Tinto. Due to safety concerns after a fatal dam disaster, Vale stopped production for a year, therefore the only way was to import iron ore from Australia. China imports at least 700 million tons of iron ore per year from Australia, and at US$20 per ton of iron ore mining cost, the two Australian companies profit US$269 million per day from China. I did some rough calculations, BHP and Rio Tinto can pay up to US$30 billion of corporate income tax annually to the Australian government. The Australian government has made a fortune from the strife between China and Australia. As the global economy recovers, Australia will take the lead and will be in the best financial position.

Will iron ore prices fall? That depends on the relationship between Australia and China. Will it improve? No, it will not. For example, I have to buy food from you, but I keep aggravating to you so much that you double the price of the food you sell me. Would you improve your relationship with me if the worse our relationship was, the more money you would make?

(He Jiangbing is a Chinese financial commentator.)

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