The Effect of China's Demand for Iron Ore on the Australian Economy

Introduction

China and Australian counties are known for their excellent trading partnership. It is a two-way investment relationship where every country benefits from each other through export and import. The collaboration between China and Australian has generated different implication other countries such as Japan. China economy relies mostly on urbanization, high infrastructure investment and continues growth and development of manufacturing industries. These have created high demand for manufacturing raw materials, building raw materials and energy for transport and electricity. These create high demand for iron ore and black coal, which is one of the primary raw materials Chinese industries depend on for their production. Australian has been at better position supplying these resources to China to meet a lot of this demand. On the other hand, Australian is a ready market for manufactured goods from China. This paper will look at the effect of China demand for iron ore on the Australian economy.

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Evolvement of China's Demand, Australian Investment, and Supply of Iron Ore in the Past Fifteen Years.Over the past decade, China increases demand for iron ore due to high steel production, which is an output of iron ore. China's economy has risen rapidly due to urbanization leading to high demand for steel production. Since 2001, importation of iron ore has rapidly increased above five hundred million tons in 2006. These led to chain overtaking Japan in the world largest importer of iron ore. Between 2007 and 2009, China's iron demand become more robust due to the rapid increase in manufacturing industries in China leading to supply oversea deposits (Cassidy, N. and Kosev, M., 2015.). During 2010- 2014, international iron ore prices increase due to Yuan invest that led to high consumption of steel in China increase demand for iron ore. Since then, the economy of China has steadily grown stimulating gradually high supply exceeding demand. By 2017, the need for iron ore had increased fourteen time of that of 2000 due to a high consumer market.

The evolvement of China's demand for iron ore had been fuelled by urbanization economy that has to high demand for steel and ready consumer market. Another reason is due to industrialization in the countries that use iron ore as raw material. The past few years the economy of China has slowly developed leading to low demand for iron ore. China's economy is known to link with iron ore strongly. A decrease in the need for iron core by China led to a reduction in its prices as well as the economy of China. It has been influenced by China's economy changing from urbanization to manufacturing product economy. Another reason is due to ecological concern by the China government on steel producer causing steel production to wane as well as a decrease in demand for iron ore.

Australian invests heavily in the mining sector that has seen an increase in GDP to around eight per cent. At around 2000s Australian investment spending in iron ore mining rose to about two per cent. By 2013, the investment in the mining sector had risen above one hundred and thirty million dollars. High demand of iron ore due to increased rapidly of urbanization and industrialization in China led to high investment in the mining sector (Cassidy, N. and Kosev, M., 2015). Australian miners invested heavily to respond to China demand for iron ore and higher prices in the market. Australian investment sending started to reduce since 2014 since many of its project had been completed. The production had been stabilized, and they could now enjoy the benefit of increased resource export. China's industries also formed joint ventures with Australian companies to oversee iron ore investment project. The collaboration resulted in the construction and design of large-scale iron ore projects.

These have led to an increase in the share of economic activities driven by the resource sector. The growth of Australian economy has increased rapidly by the supply of iron ore between 2005 and 2011 this was as a result of a continuous supply of iron ore to Chinas industries contributing to more than sixty per cent of total export resources (Parkinson, M., 2011). The demand for steel products necessitated the increase in price value of thus making the price of iron ore to increase, Australia is the leading country that produces a massive amount of iron ore benefiting its economy positively.

China is also known to produce iron ore, but the supply is insufficient to cater for its needs. This is because ninety per cent of its out is influenced by iron ore thus led to high demand for iron ore. These have resulted in China highly dependence on importation of iron ore. At around 2000, the import of iron ore had risen sharply with the import growth rate of more than forty per cent. Due to intensive in investment in iron ore by the Australian government led to the high supply of raw material. By 2016, China's iron ore supplied from foreign countries mostly Australian had risen to above eight per cent. Increase in demand for iron ore led to high supply to cater for continuous needs in the urbanization economy.

The Impact in Australian Macroeconomic Cycle and Labor Demand.

Australian focus on the mining sector that significantly increases the real GDP. Due to recent high demand on iron ore, Austrian has invested heavily in the mining sector of resources resulting to over eight per cent increase in GDP (Robinson, Atkin, Caputo, & Wang, 2015). These have been driven by the high price of bulk commodities promoting the mining firms. It increases export volumes leading to an appreciation of real exchange rate thus making the Australian dollar strong in the global market with intensified import demand. It backed government revenue leading to global economic growth in Australian (Moore, A., 2017). Increase in output per capital indicates well utilisation of factors of production such as labour. It has helped to develop infrastructure, transport, and other social amenities.

Increase in real GDP and investment in mining firms has resulted in reducing the unemployment rate in Australia. It increases household income thus boosting consumer spending in Australia promoting growth, rising income and wealth. With the growth in employment and rising salaries led to an increase in revenue that in turn led to rapid house price growth (Lane, K. and Rosewall, T., 2015). These led to household development and wealth increase to an above average rate due to an increase in spending on house asset and stock market returns. Nevertheless, it reduced saving among household as they will take more debt. At the trade boom level, unemployment shrinks while economic growth rate expanded.

In 2014, the growth in national income reduces below the GDP growth rate due to stand still on investment in mining sector.it has led to a reducing per capita income used to gauge the living standard. It has been influenced by slow global growth seen a close all economy such as low inflation, slower productivity growth and week investment (Parkinson, M., 2011). These have resulted in an increase in the unemployment rate in the country. The massive increase in labor supply surpassing demand in the labor market has also led to a rise in unemployment.

Challenges for Fiscal and Monetary Policy in Managing Macroeconomic Cycle.The fiscal and monetary policies are used to control the cyclical of business macroeconomics. A country is always faced with a hard decision to decide on an appropriate policy framework to adopt for the best of its macroeconomic. The role of fiscal and monetary policies is maintaining positive economic growth, maintaining maximum employment and controlling inflation. Fiscal policy regulates the government spending power and the tax cut whereas monetary policy involves the situation where the government influences the demand and supply through the interest rates.

In the past few years, Australian has experience volatility on global equity and credit markets. The Australian government needs to adopt a regulated monetary policy that increases the interest rate in the market to sustain global growth (Moore, A., 2017). These will ensure it reduce the lending rate of the bank to households thus being able to maintain low default rates. It will also ensure it has enough corporate earning to support the current business valuation.

One of the significant monetary policy consideration is the rise in terms of trade. For example, between the periods of 2004 to 2008 the RBA has a two-year prediction on inflation based on the assumption of the constant cash rate. It resulted in monetary policy pick up at around 2007. It was clear the pressure in the economy was leading to inflation that later followed by a financial crisis in Australian (Lane, K. and Rosewall, T., 2015). It indicated the important of RBA monetary policy in controlling and providing liquidity and flexibility in the domestic money market. Use of RBA helps in increasing the supply of settlement balance to manage liquidity and offer a different pool of securities in the country.

Fiscal policies are used to control the budget of a country. Australia is well known for its robust implementation of the fiscal policy that has seen continuously providing a surplus budget compared to other counties. These keep it in a better position to handle any emergency in the county and outbreak of financial crisis like the one that was experienced in 2008. In 2008 when economic growth slows, fiscal policy was implemented to reduce income tax and increase the transfer of payment in the household, and increase in asset build up. These were to ensure continuous economic growth of Austria.

Even with the use of monetary policy, there is slower growth in employment that is a crucial economic factor as many forecasters are considering viewing the long-term potential real GDP growth. They use the current financial crisis such as productive capital on the effect of long investment, reducing labor force participation rates and increasing structural unemployment (Robinson, Atkin, Caputo, & Wang, 2015). This is to ensure they understand the movement of macroeconomic factors such as unemployment as forecaster has continued to reduce views for global growth in Austria.

Another significant challenge is the adoption of policies on the role of the public sector in developing and provision of infrastructure. Public investment by the government on new technology and infrastructure promote rapid growth in a country GDP. The government limited their borrowing capacity that may be used to improve public investment so as they can maintain an excellent credit rating. These approaches hinder the growth of national income, the creation of employment opportunities by both the private and public sector.

Opportunities and Risks to the Future of Australia's Ongoing Iron Ore.In recent years, the demand for iron ore has reduced due to China government environmental concerns. These will see changes in Austria economy since they greatly depend on it for growth. With such kind of risk it better Australia country to diversify their focus to non-mining investment to support growth economy. Some of the opportunities to undertake in non-mining investment include non-mining business, changing the composition of output to fit the current ecological conditions, increasing non-mining capital expenditure on public financing and agricultural sector. It will create diversity in the contribution of total GDP.

Another great opportunity is that China investment in Australia in term of saving will be of great help in funding domestic project and expansion. These led to the creation of opportunities for the Australian g...