The iron ore market is wrong-footing forecasters again, as it has throughout the last 20 years. Nobody expected the iron ore price to surpass US$200 a tonne as it did in May and no one predicted it would then plunge to less than US$100 as it has this week.

This report argues that Australia’s troubled relationship with China will be influenced by which path the iron ore market takes over the medium term.

China’s authorities are determined to reduce their dependence on Australian iron ore, both by seeking alternative supplies and by capping their steel production.

However, China has been trying and failing to curb its steel production for the past five years, with many local governments ignoring central orders. In just the first six months of this year, 18 new blast furnaces capable of producing as much steel as Germany’s entire output were approved.

Although China will never be able to rid itself entirely of the need for Australian supplies, this report warns that if an iron ore glut emerges, whether by Chinese government design or because of an economic downturn, the commodity may join the list of other Australian exports subject to Chinese coercion.

The report also highlights that the effort to reduce its dependence on Australia will come at considerable cost to China. Australia is by far the cheapest and closest source of high-quality iron ore for China’s mills.