(Bloomberg) -- Australia, the most China-reliant economy in the world, is bracing for further disruptions to its commodities sector amid tensions with Beijing that’ve already jolted beef, wine and barley producers.
The trading partner is Australia’s key market for goods exports, accounting for about 39% of all shipments in the most recent fiscal year, according to Bloomberg Economics. Its dependence puts products including coal and dairy, where China has domestic supplies or alternative import sources, at risk.
“China has got a very clear strategy to retaliate for Australia’s political views,” said Tim Murray, managing partner of China-focused J Capital Research Ltd., who previously worked for Australia’s trade department. “That hurts us significantly because they are key exports for us, but they’re not key imports for them.”
Ties between the trading partners deteriorated after Australia’s government called for an independent inquiry into the origins of the coronavirus pandemic. Australia has also banned Huawei Technologies Co. from participating in its 5G network and passed a law to stem foreign interference that was aimed at China.
Here are the key commodities involved, and the prospects that they could be ensnared in the dispute:
Coal
Coal has been a consistent target in trade tiffs, most recently in 2019 when shipments became subject to port delays. It’s one of the few commodities in which China is largely self-sufficient, as it mines and burns about half the world’s supply, and its power plants use imports for just a small fraction of their fuel.
Australia has accounted for less than a quarter of China’s thermal coal imports this year, behind Indonesia which sells cheaper, lower-quality supplies. China is also supporting companies in opening more advanced coal mines so it can boost its production capacity in the coming years, making imports an even more susceptible target to trade disputes.
Higher-quality coking coal is a different story, as China’s mines produce less of it and the country’s steel-making giants are still reliant on imports. Australia is a dominant supplier in that market, accounting for more than 60% of the total this year.
Dairy
Australia’s dairy industry is on high alert, after people familiar suggested it could be marked for trade restrictions. Evidence of strain has already emerged after China Mengniu Dairy Co. last month scrapped its plans to buy Kirin Holdings Co.’s Australian beverage unit after being told the deal would likely be blocked.
China is the world biggest importer of dairy products and was Australia’s top export market in 2018-19 after doubling over five years. Demand has been weaker this year amid coronavirus lockdowns, which have curbed restaurant dining.
Recent price weakness is expected to continue for Australian and New Zealand dairy exporters for some time, as China’s domestic production ramps up, Rabobank said in August. China’s milk output is tipped to have risen 4%-4.5% in the first half of this year, and its dairy herd is forecast to grow in the coming years, based on the number of projects reported to be in planning and construction.
While the state-linked Global Times earlier this year raised the possibility that Australian iron ore supply could be targeted, it’s likely to be low on the list of possibilities. The country dominates China’s iron ore supply, accounting for more than 60% of its imports, with next-biggest supplier Brazil making up less than 20% so far this year.
In fact, the trade is booming, with China importing a record amount of Australian iron ore in July. Still, investors will keep a close eye on any sign of tensions spilling over as even small moves to restrict the movement of Australia’s most valuable commodity -- worth about A$100 billion this fiscal year -- would send a powerful signal.
LNG
Australia has accounted for just less than half of China’s liquefied natural gas imports this year. The proportion has grown in recent years as new Australian projects came online, including two in Queensland in which Chinese oil majors are partners.
Those partnerships, along with long-term contracts that obligate Chinese buyers to purchase millions of tons of LNG a year from Australia well into the 2030s, make the trade flow a more complicated candidate for disruption.
©2020 Bloomberg L.P.