China could run out of retaliatory measures it can afford to take against Australia after it cuts off economic affairs communications with its main commodity supplier this month.

On May 6, China’s main planning agency announced that it had suspended all contacts in its bilateral strategic economic dialogue with Australia “indefinitely”.

“Recently, some Australian Commonwealth government officials launched a series of measures to disrupt normal China-Australia trade and cooperation due to the Cold War mindset and ideological discrimination.” the National Development and Reform Commission (NDRC) said in a statement.

Chinese Commerce Ministry adviser Mei Xinyu blamed the cut on “the madness of Australian politicians”, while Foreign Ministry spokesman Wang Wenbin cited “senseless crackdown on Sino-Australian cooperation” . Daily mail and Reuters reported.

Although no specific reason was given, the references were to Prime Minister Scott Morrison’s decision in April to rescind Victoria state’s agreement to cooperate with China’s Belt and Road Initiative (BRI). . Beijing’s vast trade and infrastructure-building program was not in Australia’s “national interest”, Morrison said.

Concretely, closing the chain of dialogue may have little effect since the two parties have not met under its auspices since 2017.

“Successive Australian trade ministers have not been able to secure a phone call with their Chinese counterparts since diplomatic tensions escalated in 2020,” Reuters said.

The differences between the two trading partners date back several years, with issues ranging from Australia’s ban on Chinese 5G phone network developers to criticism of its claims to sovereignty in the South China Sea.

Disputes have also erupted over China’s crackdown on Uyghurs in Xinjiang and Australia’s support for researching the origins of COVID-19.

Last November, China released a list of 14 grievances against Australia, including its support for US political positions.

In December, the NDRC took up economic stakes for its main foreign coal supplier by banning further shipments from Australia, blocking dozens of cargoes off Chinese ports.

Despite a free trade agreement between the two countries in 2015, China imposed high tariffs and other barriers on Australian products, including wine, barley, lobsters, cotton and timber.

The value of Australian exports to China was supported by continued Chinese demand for iron ore, but trade in most categories fell 40%, Australian ABC News reported in late March.

Last December, the country’s coal exports to China fell 83% from pre-pandemic levels a year earlier, according to the network.

Limited reprisals

But China’s sanctions schemes indicate that it is carefully limiting retaliation to measures it can afford.

The shutdown of the strategic dialogue mechanism grabbed the headlines, but the talks are relatively cheap compared to the potential economic impact of China’s trade restrictions.

China accounted for 35% of Australia’s merchandise exports in March, Argus Media said, as demand continued to support liquefied natural gas (LNG) and iron ore supplies in the Chinese market.

Analysts suggest Australia will continue to be China’s indispensable source for these products, although Beijing’s anger at the policy differences spares little else.

In the wake of the suspension of the strategic dialogue, industry sources “have mostly dismissed” the risk of China retaliating against Australia’s LNG trade, Argus said.

“China certainly cannot do without Australian LNG in this market,” the news service said, citing a European-based trader. “It would be almost impossible,” the insider said.

Australia supplied 43.4% of China’s LNG imports last year and 44.5% of its intake in March, Argus reported.

In April, Chinese LNG imports of more than 3 million metric tons (mmt) hit a record high, Reuters said on Friday, citing Chinese customs data.

Such large volumes are unlikely to be replaced by other suppliers, and large reductions could result in higher costs.

Much of Australia’s LNG exports to China have been covered by long-term contracts, which protect buyers from spikes in spot market prices in winter, but can be seen as a disadvantage when prices collapse, like last year’s oil glut.

Rising tensions have reportedly made China’s national oil companies wary of seeking new long-term contracts with Australia, with old ones starting to expire last year. The investment in new projects was also done in a cloud.

But despite the sharp swings in the spot market, China has pledged to increase its gas consumption while trying to reduce its reliance on highly polluting coal.

In March, energy consultancy firm ICIS predicted a 13% increase in Chinese LNG imports to 76 mmt this year, the China Daily reported.

“As China strives to increase the share of gas in the energy mix by replacing coal, this need for LNG will continue to grow,” said Philip Andrews-Speed, senior researcher at the Institute for Energy Studies from the National University of Singapore.

“Despite the growth of the spot market, the sale of LNG continues to rely on long-term supply contracts, especially for new and very large projects, unlike coal, which is much more flexible,” he said. -he declares.

Andrews-Speed ​​also spoke about the shutdown of a major LNG project in Mozambique following attacks by militants affiliated with the Islamic State in March. The deadly conflict prompted Total France to withdraw all its staff, putting an end to the development of 20 billion dollars (128.3 billion yuan).

As a result, “the medium-term outlook for global LNG supply looks rather tighter now than it was a few months ago,” Andrews-Speed ​​said.

Confidence uncertain

But confidence in the immunity of Australian LNG exports from China’s retaliatory measures is not set in stone.

On May 10, Bloomberg News reported that two of China’s smaller importers were effectively barred from purchasing new LNG shipments from Australia.

“The companies have received verbal orders from government officials to avoid purchasing additional LNG from Australia for delivery within the next year,” Bloomberg said, citing “unidentified people with knowledge of the directive.”

So far, major buyers have not received similar orders and the NDRC has not responded to inquiries, according to the report.

The ban on small buyers may be China’s way of showing its displeasure, suggesting major economic consequences for trade in a product seen as exempt from the campaign of retaliation against Australia.

On May 19, Reuters reported that China’s state-owned oil companies had started talks with Qatar to participate in the $ 28.7 billion (184.7 billion yuan) North Field expansion, the largest project in China. LNG to the world.

China’s interest could be a sign that it is considering going without Australian LNG in the longer term.

A miner holds a piece of iron ore in a mine in the Pilbara region of Western Australia. File photo: Reuters

Tensions on iron ore

Tensions are also mounting over iron ore, Australia’s first export to China and an irreplaceable resource for the world’s largest steel maker.

Last year, Australia’s 713 million tonne ore exports accounted for 61 percent of China’s ore imports, according to data from the Beijing Lange Steel Information Research Center as cited by the Chinese Communist Party tabloid. . Global Times.

China ran out of patience and options to punish Australia, increasing risks to the iron ore trade as prices rose, the South China Morning Post reported this month.

“Neither side wants to use this card. We’re basically holding each other by the neck,” the paper said, citing a diplomatic source.

Record prices for iron ore supplies have heightened concerns over mounting cost pressures in the Chinese steel industry, although the main cause of the surge in prices has been demand from China.

Last year, China’s crude steel production exceeded 1 billion metric tons, setting a record with a 5.2% increase in production thanks to the recovery of COVID and investments in infrastructure. Production has increased further so far this year, gaining 15.6% through March.

The government ordered major changes in the steel industry to reduce dependence on imported iron ore, but the preemptive purchases gave prices an extra boost before the changes took effect.

“Some Chinese importers are also rushing to stockpile iron ore due to political concerns of risk aversion, which also spiked trade volume in April,” Global Times mentionned.

Analysts are divided on how far China will go to sever ties with Australia over critical commodities of iron ore and steel.

The Australian Mining magazine website quotes senior analyst Shirley Zhang of international consultancy Wood Mackenzie as saying China is “unlikely to ban imports of Australian products it heavily relies on, including iron ore.” .

Instead, China should increase the administrative costs of imports, Zhang said.

But the Global Times sounded a more disturbing note, citing anonymous analysts saying that “a trade decoupling between the two countries is imminent amid frosty bilateral ties.”

This week, the NDRC said China should diversify its sources of iron ore, sending another warning signal to Australian suppliers.

“Chinese companies should boost domestic exploration for steel inputs, expand their sources of imports and explore overseas ore resources,” the agency said, according to Bloomberg.



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