Cooling relations between the commodity powerhouses of China and Australia may point to trade troubles ahead when the world emerges from the Covid-19 pandemic.
The dispute stems from Australian foreign minister Marise Payne’s call last month for an independent inquiry into the origins of Covid-19 and China’s handling of the outbreak, a move that riled China. Trade tariffs and restrictions have ensued.
Earlier this month, China imposed tariffs of over 80% on imports of Australian barley after an 18-month antidumping and anti-subsidy probe reached a conclusion.
Australia’s beef industry has also been threatened with trade restrictions with four abattoirs banned from supplying meat and there are reports emerging that Australian thermal coal imports are also under scrutiny. Unsubstantiated reports claim that Chinese power plants have been warned not to buy Australian coal.
Australian LNG exporters are getting antsy too. With the world’s largest LNG production capacity, Australian LNG accounted for just under 50% of China’s imports last year. Added to which, Chinese state-owned companies have significant stakes in Australian LNG projects.
China’s General Administration of Customs has also declared that it will streamline the inspection procedures for imported Australian iron ore at Chinese ports to facilitate trade. According to the new rules, which take effect on June 1, customs officials will inspect iron ore at the request of the trader or the importer. Previously, customs officers conducted mandatory on-site inspections of iron ore batch by batch.
Australia’s economic dependence on trade with China is significant. According to the April Australia-China monthly wrap-up, of the A$149.2 billion in Australian exports to China in the 12 months to February 2020, iron ore, coal, and natural gas accounted for A$80.7 billion, A$14.2 billion and A$13 billion respectively.
However, some commodities are safer from potential trade disputes than others according to Xunpeng Shi, a principal research fellow at the Australia-China Relations Institute, University of Technology Sydney. In a paper for The Asia & the Pacific Policy Society Policy Forum, he said that Australian natural gas exports are unlikely to be targeted for two reasons.
“First, natural gas contracts are often very long-term with little volume flexibility. Second, since natural gas prices have reached historically low levels, and China’s prices are lower than Australia’s domestic spot gas prices, a trade restriction will benefit, rather than hurt, the Australian economy, making this a pointless move from China.”
Dr Shi also believes that iron ore supplies should be protected. “The truth is that no other country could fill the gap in iron ore supply that would be left by Australia in the event of a trade ban,” he says. There was already a shortage of iron ore in the market, and Covid-19 has further weakened iron ore supply capacity in Brazil, the second largest iron ore exporter. “While China could theoretically hurt Australia with a trade boycott on iron ore, it would significantly damage its own economy in the process, making this an unlikely course of action.”
While China’s announcement that it will change inspection procedures for iron ore was viewed negatively in some quarters, Australia’s largest miners reacted positively to the news. In a statement BHP welcomed the changes, which it said had been in the works for some time.
“We’re supportive of the changes to the iron ore inspection process and believe it will create a more efficient supply chain for producers like us as well as our Chinese customers,” BHP said.
“Our customers will have greater option to choose which inspection service to use for iron ore imports and whether to do it from the load port or the discharge port, potentially speeding up the process for all parties.” Fortescue Metals Group has also publicly supported the changes.
But coal is a different matter. According to Dr Shi it’s the one trade that could fall victim to future Australia/China trade disagreements.
Dr Shi said: “Coal is the most likely resource commodity to be subject to China’s further trade restrictions because China has more alternative suppliers than it could turn to.” In 2018, China imported 35.4% from Australia, 31.3% from Indonesia, 15.9% from Mongolia, and 11.7% from Russia.
But looking holistically, Dr Shi points out that it’s important that Australia does not cave to hysteria or fear about any possible coal trade restrictions. “While China has the option to boycott Australia’s coal, the volume of trade is so big that a boycott would damage the relationship far more than China would be considering, particularly when more vulnerable commodities, such as beef, wine and diary products could be considered first.”
That said, he does concede that there could be still be trade frictions ahead amid weak demand for coal and mounting pressure to protect the Chinese domestic coal industry. “But a measured approach that takes these facts into account is the best way forward for Australian leaders,” he concluded.
Source: Baltic Exchange