China’s Trade Attack On Australia Is Producing Perverse Results

China’s attempt to punish Australia over a range of disputes, including the origin of the Covid-19 pandemic, continue to produce contradictory results and have the potential to keep key commodity prices higher for longer. A ban on Australian thermal coal used to generate electricity has seen ships with cargoes of Australian coal left at anchor off Chinese ports while electricity prices in parts of China soar during what has been a particularly cold start to winter. Some Australian coal miners have been hurt by the Chinese ban but so have consumers in China forced to pay more for power as well as endure power rationing. But the most perverse effect of the coal ban is strong demand for other sources of energy, particularly liquefied natural gas (LNG) which has just hit an all-time record price of $20.70 per million British thermal units. Chinese gas buyers have joined Japanese and South Korean power utilities in scrambling for supplies with Australia one of the major beneficiaries because it is the world’s second second biggest LNG exporter. Where China has hurt Australia has been largely in small export industries such as barley, timber, meat, seafood and wine, all businesses able to re-direct most of their exports to other countries. Trade Continues Despite Diplomatic SpatsOne of the best measures of how the China v Australia dispute can be demonstrated to be more political than commercial lies in the overall trade numbers which show a modest (2%) decline in Australian exports to China in the 11 months to the end of November and a 5% increase in Australian imports of Chinese goods. In dollar terms, China sold $76.3 billion worth of goods and services to Australia up to November 30 while Australian exports to China totaled $132.5 billion. The dominant Australian export to China remains iron ore which has been in heavy demand thanks to strong rates of steel production and a slow recovery in Brazilian iron ore shipments after a series of industrial accidents and the effects of Covid-19 on the Brazilian workforce. The next phase of the China v Australia trade war, which has been likened to a David v Goliath struggle, is expected to be a determined effort by China to reduce its reliance on Australian iron ore which currently accounts for an estimated 60% of Chinese imports. African Coming, SlowlyBut, to achieve its aim China needs to encourage the construction of new iron ore mines in other countries, something it is doing in Africa, particularly in Guinea where the giant Simandou project is slowly taking shape. First ore from Simandou is not expected for at least three, and possibly five years, which means that Australian miners can expect to enjoy strong earnings for some time while also having no incentive to invest in expanding output because of Chinese trade threats.

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