China drives demand for Australian iron ore

Rapid urbanization in China has been a key driver of global steel demand and will continue to boost the demand for Australian iron ore for the next couple of decades, according to the September Quarter Bulletin released on Thursday by the Reserve Bank of Australia (RBA).

"In 2010, China constructed more residential floor space than the entire dwelling stock in Australia. This high level of construction follows two decades of strong growth, during which the amount of annual floor space completed more than doubled," Leon Berkelmans and Hao Wang from the RBA's economics group said in the Bulletin.

"All of this increase in residential construction has been driven by construction in urban areas, while construction in rural areas has stagnated."

The RBA researchers believe that residential construction is an important source of Chinese growth.

"As a consequence, China's increased appetite for raw materials has resulted in a significant increase in Australian commodity exports, especially for iron ore and coking coal," they said.

China's urban population is expected to increase by 42 percent over the next two decades and by 2030 about 70 percent of the total population will be living in urban areas, the researchers said.

However, the researchers said the growth rate of China's urban population would slow over the next two decades.

"The level of urban residential construction is expected to peak by the end of this decade at a level that is about 12 percent higher than in 2011," the RBA report said.

"Australia is well placed to retain its position as the largest supplier of iron ore to China in the coming years, particularly given the relatively low cost of extraction of iron ore in Australia."