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China-Australia tensions rattle world's most co-dependent trading relationship

  • Author
  • Paul Bartholomew    Gawoon Philip Vahn    Rohan Somwanshi
  • Editor
  • Wendy Wells
  • Commodity
  • Agriculture Coal LNG Natural Gas Oil Metals

Melbourne — Australian Prime Minister Scott Morrison sparked China's ire late April by demanding an international investigation into the source of the coronavirus. The two countries have been trading rhetorical blows ever since, compounding tensions that have gradually ratcheted up over the past two years.

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On Thursday, strident government-backed Chinese tabloid the Global Times described Australia as being "blinded by lust to act as a US attack dog" that threatened to "destroy ties" with its most important trading partner.

Australia relies hugely on China for inbound tourism and foreign students. But most importantly, China is the major customer of Australian commodities, and increasingly energy.

China, for its part, depends on Australia to supply iron ore and high quality coking coal to feed its steel mills and thermal coal to feed its power plants. Indonesia is the world's largest exporter of thermal coal, but in most cases, there are no alternative suppliers of a similar size and quality to Australia. Similarly, no country is likely to replace Chinese demand for Australian energy and commodities.

China's iron ore suppliers

So far, China has largely taken out its displeasure on Australian agricultural products such as beef and barley. Australian abattoirs were surprised to be notified by Chinese Customs of paperwork errors. China has now banned imports from four abattoirs from May 12. Market participants in Australia are worried about China mulling hefty tariffs on barley imports of up to 80%. China takes in more than 50% of Australian barley exports.

China also warned this week that it could swap Australian iron ore with African iron ore; and Australian LNG with Brazilian LNG. China Iron & Steel Association vice-chairman Li Xinchuang sounded a note of caution by pointing out that it would take China four-to-five years to tap iron ore deposits in Africa. Over January-March, Africa supplied 16.1 million mt of iron ore to China, while Australia supplied 161.3 million mt, China customs data showed.

Some market participants in China say the National Development & Reform Commission may look into "excessive coal imports" this year – with Australian coal likely to loom large in the state planner's sites. Imported coking coal prices have been cheaper than domestic prices since April, making Australian material extremely attractive. In the worst-case scenario, any ban or restrictions on Australian coking coal would likely push up prices and make steel more expensive.

Some Chinese port-related restrictions on coal imports have been an ongoing event since late 2018, causing delays to the unloading of thermal and metallurgical coal cargoes, and were not necessarily targeting Australian coals. South32 CEO Graham Kerr has noted that Chinese coal import restrictions may cap any potential price upside in the near term.

Metcoal trade forecast

Australia exports


** China accounts for almost one-third of Australia's total exports and contributes around 6% of Australia's GDP. Coal exports are worth almost 4% of GDP.

** Iron ore, coal and gas comprise around 60% of exports to China, according to the Department of Foreign Affairs and Trade.

** Australia supplied 62% of the 1.07 billion mt of iron ore imported by China last year, China customs data shows. China accounted for 85% of the 171 million mt of iron ore exported from Western Australia's Port Hedland over January-April.

** Australia exported 2.36 million barrels of crude oil and condensate to China over January-February, up 7.8% year on year, latest data from the Australian government's Department of Environment and Energy showed.

** Australia imported 3.48 million barrels of diesel fuel and 275,518 barrels of gasoline from China over January-February, up 127% and 8.3% respectively, from a year earlier, the department's data showed.

** Some 28% of Australia's total farm production is exported to China; 18% of its beef production and 49% of barley, according to the National Farmers' Federation.

** China purchased 463,915 mt of wheat from Australia between January and March, according to Beijing-based Cofeed, compared with just 182,969 mt in all of 2019.

** Around 40% of Australia's LNG exports go to China, accounting for some 40% of China's LNG requirements.

** The value of Australia's LNG exports in March rose 8% on year to $4.6 billion, Australian Bureau of Statistics data showed.

** The China-Australia Free Trade Agreement took effect in December 2015. A tariff of 3% on coking coal exports was scrapped immediately and a 6% tariff on thermal coal exports was eliminated in January 2017.

** China contributed $12 billion of "education related" travel in Australia and $4.3 billion in personal tourism in the 12 months to June 30, 2019, according to the Department of Foreign Affairs and Trade.

** In 2019, there were more than 2 million Chinese students in Australia.