Chinese President Xi Jinping (L) and Australian Prime Minister Scott Morrison became locked in a trade spat. Image: Facebook

PERTH – Australia is often blamed for putting all its eggs and everything else into one basket then shipping the lot to China.

Those who worry about Beijing’s resultant leverage over Australia may feel vindicated after the travails of 2020 and 2021, but the trade war rooted in geopolitics hasn’t net-net hurt the Australian economy or its crucial commodity exports.

Indeed, China is spending more than ever on imports from Australia, given its reliance on iron ore and liquefied natural gas (LNG), two commodities commanding ever-higher prices on global markets and for which Australia is the world’s largest exporter.

So far China has hit Australian coal, barley, meat, lobsters and wine with punitive trade measures, a tit for tat response to Australia’s call for an independent investigation into the origins of the Covid-19 pandemic that by all credible accounts started in Wuhan, China.

Australia’s A$1 billion wine export industry reported a 96% drop in exports in the first quarter of 2021 after Chinese anti-dumping sanctions hit profits in the fourth quarter of 2020. 

After the recent announcement of an “indefinite” halt of the China-Australia Strategic Economic Dialogue, China is now apparently moving beyond beef and booze to target Australian LNG exports. 

A Bloomberg report citing unnamed sources said that two second-tier Chinese LNG importers have been told by Beijing not to take any Aussie cargoes of the fuel for a year.

An Australian LNG shipment at sea. Photo: Facebook

China’s tier-one importers, namely petro-giants like CNOOC, Sinopec and PetroChina, all hold shares in three LNG projects in Queensland where the fuel is mainly sold under long-term contracts linked to oil prices with a three-month lag. 

It is unlikely in the short term Beijing will be able to force the national oil companies’ (NOCs) hands too much, unless China seeks to end up in pointless arbitration while paying a premium on the spot market for gas.

Australian deliveries to China have actually been growing this year with 29 cargoes in February, 37 in March and 43 in April. Based on tracking data, the 43 cargoes delivered from Australia to China in April were just short of a record, Adelaide consultancy EnergyQuest said in its April monthly LNG and gas report released on May 14. 

Commodities commentators, meanwhile, say a Chinese move against LNG imports from Australia would mark a major escalation in their trade war. Australia is China’s single largest supplier of LNG; China and Japan vary month to month as the largest importer of the fuel. 

To be sure, Australian coal has taken a hit. Australian cargoes have not been allowed into China – the world’s biggest importer – for close to a year, prompting calls for a reasoned diplomatic resolution.

The coal dispute that began years ago under Prime Ministers Tony Abbott and Malcolm Turnbull has festered since under Scott Morrison through a series of go-nowhere resets. 

Commodities commentator Clyde Russell says China’s coal imports were down by 20.5% in April over the prior month and fell almost 30% over a year ago. China is paying twice as much for Russian coal of the same caloric value as that produced in New South Wales. China is also taking more coal of a lesser grade from Indonesia.

Ships carrying coal along the Beijing-Hangzhou Grand Canal January 10, 2021. Photo: Imaginechina via AFP/Stringer

Meanwhile, Australian coal producers are starting to pivot to other markets, including India, the world’s second-largest importer. India’s imports of Australian coal hit a record high of 6.75 million tonnes in January, before the country’s Covid catastrophe took hold.

Australia’s thermal coal exports to India were 1.87 million tonnes in December 2020, up 450% from 340,000 tonnes in December 2019, according to data from commodity price reporting agency Argus.

“Supply chains disrupted by China’s informal import restrictions have already largely reorganized, allowing Australia to successfully redirect to new markets,” the latest Resources and Energy Quarterly says. 

“Metallurgical coal export earnings are expected to fall to A$23 billion in 2020–21, impacted by China’s informal import restrictions and by the subsequent lowering in prices for Australian coal.

“However, a recovery is expected through the outlook period, as mines resume operations, newly formed supply chains strengthen and demand grows in India, Europe and South Asia. This recovery is expected to lift export volumes back to 191 million tonnes, and export earnings up to $31 billion (in real terms) by 2026,” it said. 

According to Wood Mackenzie analysis released after a new national budget was handed down by Treasurer Josh Frydenberg this week, “rising commodity prices trims the budget deficit by approximately 25% for the current fiscal year.”

Should iron ore stay at current historically high prices to the end of the March quarter in 2022, it will add A$12.5 billion to Australia’s budget, the analysis said.  

China cannot substitute the iron ore it takes from Australia and prices are at all-time highs after a climb through 2020. It can, however, import wine from elsewhere.

A Chinese customer peruses Penfolds Rawson’s Retreat wine from Australia at a supermarket in Shanghai. Photo: AFP

Australia’s largest wine export markets after China are valued at less than half, though the pandemic drove up UK imports by 29% to A$456 million, while the US was up 4% to $434 million and Hong Kong 27% to $132 million for 2020. Australia does not have a free trade agreement (FTA) with the UK but it does have one with the US. 

It also has FTAs with major Asian economies Singapore (2003), Thailand (2005), Malaysia (2013) Korea (2014), Japan (2015) Indonesia (2019) and Hong Kong (2020). It is now working towards one with India. 

Yet all these combined don’t offer the simple bulk of the giant Chinese market, even as Canberra makes efforts at diversification and market watchers grumble over Australian trade dependence on Beijing. 

Australia and China signed their free trade agreement, the ChAFTA, in December 2015 after years of protracted negotiations.

For Australia, it was predicated on the evergreen promise of access to China’s growing middle class and, outside of bulk commodities, higher-end shipments like wine and eventually services. 

Fast forward to the present, it’s not working out that way. China has already warned its students may not return to Australia, threatening to withhold its single largest source of full tuition-paying foreign students. 

This has not deterred Aussie hawks, however. Current Defense Minister Peter Dutton recently promised to look over all states’ agreements with China, including the highly controversial Port of Darwin 99-year lease held by Chinese company Landbridge Group.

Australia’s Darwin Port is under a 99-year lease to China’s Landbridge Company. Image: Agencies

Cancellation of the contract, EnergyQuest has suggested, could force China into a tit-for-tat in LNG contracts. 

Canberra has already nixed a 2018 agreement Victoria made with China to participate in the Belt and Road Initiative, while the latest sally is that China-funded Confucius Institutes may face closure under a new veto bill. 

There may be few other bulk commodities China could halt in retaliation but there is always an alternate threat: refusing export licenses for Chinese-made goods and chemicals to Australia, including those needed for producing aluminum which only China makes.