A dispute over the origins of the Covid-19 Pandemic has led to a sharp deterioration in China-Australia relations and is starting to disrupt commodity trade, just as China emerges from coronavirus lockdowns with its buying power enhanced.
China this week imposed tariffs of more than 80% on imports of Australian barley as part of a long-running anti-dumping investigation. More concerning for energy market participants, traders say China is also starting to block arrivals of Australian thermal coal, after suspending beef imports and introducing tighter customs checks on wine.
The trade issues come amid growing political tensions between the two countries over the Covid-19 pandemic. Australia last month joined a call by the US for an independent investigation into the origins of the outbreak and China’s handling of it, drawing a strong response from Beijing.
Both governments insist this is not the start of a trade war. “We do not conduct our trade policy on a tit-for-tat basis,” Australian Trade Minister Simon Birmingham said after the barley tariffs were imposed. China “strictly follows Chinese laws, regulations and WTO rules”, its foreign ministry said this week.
But relations between Beijing and Canberra have been rocky for a few years, and coal trade has been caught up in political tensions before. Australia’s decision early last year to ban Chinese telecommunications firm Huawei from its 5G network was followed by a sudden tightening of import quotas for Australian Coal.
“The Australia-China trading relationship is exceptionally strong,” Australia’s then-treasurer Josh Frydenberg said at the time. It is certainly being tested again. And the stakes are even higher this time around, as the coronavirus-driven slump in the global economy slashes Australian export earnings and threatens to leave the country even more reliant on Chinese demand.
Could other commodities be affected if the dispute escalates?
Iron ore suppliers, in particular, have reason to worry. Iron ore is by far the single-largest commodity that Australia exports to China, at a total value of $54.5 billion last year, when China took almost 83% of all Australian supplies.
The sheer size of the trade may insulate iron ore from the political dispute, particularly as shipments from China’s other major supplier, Brazil, look increasingly vulnerable to the country’s spiralling coronavirus outbreak. And China this week moved to streamline import inspections in a change that was welcomed by Australian producers, further indicating that iron ore is safe from any short-term disruptions.
Australia’s thermal coal exports are much more diversified, with only around 24% heading to China last year worth less than $3 billion. Chinese utilities can easily do without Australian coal if needed, making the commodity a convenient target for any political reprisals.
LNG traders are also watching developments closely. Australia is the largest supplier of LNG to China, accounting for 50% of Chinese imports last year. This reliance on Australian cargoes and the fact that most cargoes are shipped under term deals appears to limit the risk of any disruption to supplies. But “everyone is watching this space closely,” one trader said.
Oil plays a much smaller role in bilateral trade. Australia exported only around 16,000 b/d of crude and condensate to China during January-April, according to data from oil analytics firm Vortexa.
But China is the single-biggest buyer of Australian supplies, taking almost 30% of all exports, according to government data. Refined products increasingly flow in the other direction, with China exporting 62,500 b/d of diesel to Australia in 2019, up almost fourfold from just two years earlier.
But the trade data mask a potentially uncomfortable truth for some exporters, China is buying when most other countries are not. China entered, and exited, the worst of the Covid-19 outbreak before any other country.
The government lifted most lockdowns in March, just as economies started to slump in many of other centres of commodity demand growth, notably India as well as developed nations such as Japan and the US.
China took 84% of all iron ore exports from the four largest producers in Australia’s Pilbara region last week, up from 81% in the previous week and 78% over the past 12 months. No similarly recent figures are available for thermal coal, but Chinese customs data shows Australian coal imports rising by 63% against a year earlier in the first quarter.
China’s crude imports from all sources held largely steady at 9.8mn b/d in April, just as the IEA was predicting a staggering 25mn b/d drop in global oil demand in the month. China’s rapid economic rebound from the coronavirus hints it may expand its share of these markets even further in the coming months.
With Great Power
China has not always used its growing economic and political strength to its best advantage. Questions over whether it hid early evidence of the extent of the coronavirus outbreak, and a newly aggressive “wolf warrior” mode of aggressive diplomacy, risk adding to a backlash against Beijing.
Concerns over Huawei’s links to the Chinese government, Beijing’s territorial claims in the potentially energy rich South China Sea and the impact of the trillion dollar Belt & Road Initiative have been rising up the political agenda in Washington, London, Brussels and elsewhere for some time.
China’s relations with its largest trading partner, the US, are a mess. The phase one trade agreement agreed in January appears on the brink of collapse. The deal “just does not feel the same to me,” US President Donald Trump said last week.
“The ink was barely dry when the plague came.” The failure of the agreement risks leaving tariffs on almost $500 billion of bilateral trade in place, potentially for years to come.
China and Australia do not appear to be going down the same route, yet, although attitudes on both sides may be hardening.
Government officials in the UK, EU and elsewhere have also called for an independent investigation into the coronavirus outbreak in Wuhan, but none moved as quickly as Canberra or are as dependent on commodity trade with China.
The latest deterioration in relations came just as Chinese President Xi Jinping this week accepted calls for a World Health Organisation-led inquiry into Covid-19. But Australia’s push for an independent investigation has yet to be forgiven in Beijing.
Australia should “change course and completely give up its political manoeuvres” over its calls for a probe into Covid-19, China’s foreign ministry said. If Beijing continues to use tariffs and trade boycotts as a lever to achieve this goal, commodity markets should brace for more uncertainty.