Analysts expected that China could easily cut more commodities exports from Australia should both countries’ relationships deteriorated further. Australia is one of the world’s most China-reliant economies, with 39% of all its exports going into China. Australian beef, wine and barley producers have already felt the jolt when China cut exports due to the COVID-19 pandemic.
The tensions arose when Australia called for an independent inquiry into the origins of the COVID-19 pandemic. The country also bans Huawei Technologies Co. from participating in the development of its 5G network. Analysts said that Beijing had a clear strategy to retaliate for Canberra’s political views, considering Australia is not China’s main export market.
Australia’s major commodities exports to China include coal, dairy products, iron ore, and LNG. China can easily cut coal exports from Australia given its rising domestic production. Australia’s thermal coal export to China is behind those of Indonesia, which offers cheaper, lower-quality supplies. However, Australia is China’s main supplier of higher-quality coking coal. Chinese steelmakers are still reliant on import coking coal as Chinese mines produce less of it.
International trade analysts suggested that China could mark dairy products for trade restrictions. As the world’s biggest dairy importer, China was Australia’s top export market in 2018-2019. However, China’s demand has been weak due to the pandemic, and its domestic production continues to increase. China’s milk production is expected to have grown by 4%-4.5% in the first six months of 2020.
There are low possibilities that China would target Iron Ore in its trade restrictions. Australia accounts for 60% of China’s iron ore supply, far ahead of Brazil in the second spot which has contributed to less than 20% so far this year. In fact, China imported a record volume of Australian iron ore in July. However, investors will likely monitor whether the tensions would affect Australia’s most valuable commodity.
Long-term contracts that last until the 2030s will most likely shield Australia’s LNG exports to China from trade disruptions. Besides, China’s energy companies have been partners in Australia’s LNG projects. However, it is worth noting that China has pledged to increase purchases of US energy products, including LNG under phase one deal that may affect the country’s LNG imports from its current main suppliers.
