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Geopolitical Rift Between Australia And China Reaches Boiling Point

The Chinese economic engine requires vast quantities of raw materials such as coal to power industries. While the majority of the coal is mined domestically, China is increasingly dependent on imports to satisfy its needs. Australia, in comparison, is an important exporter of several raw materials which has benefitted from the expanding South-east Asian economy in general and China's in particular. However, relations between Canberra and Beijing have deteriorated significantly over the years and reached rock-bottom which is a major threat to the Australian mining industry. The economies of the two countries are highly complementary. China requires vast quantities of raw materials such as iron ore, natural gas, and coal which Australia has in abundance. Furthermore, low production costs and relative closeness to Asian markets are important assets. The Australian mining industry is strongly dependent on Chinese imports. 

Therefore, the bellicose language of the current leadership in Canberra came as a surprise to Beijing. Political relations started to deteriorate after Huawei was effectively banned in August 2018. Canberra's call for an international investigation into the origin of the Coronavirus was the last straw for China. Since then, Beijing has increased pressure on Australia to make an example for others.

Step by step tariffs are levied on a growing list of products such as barley, beef, and wine, to name some. Australia's mining and energy sectors are the biggest export earners with a third of the revenue in 2019. The largest customers for these products are Chinese companies. Therefore, Beijing's policy shift when it comes to Australian imports is a warning for the coming difficult period. Especially sectors that can relatively easily be substituted risk being affected such as the mining industry and coal.

Related: The Top U.S. Shale Gas Basin Continues To Bleed Cash

A string of accidents and tougher environmental rules in China have made ramping up the production of coal difficult. Therefore, it is likely that consumers will remain partly dependent on imports. 

These can be divided into two types: thermal and coking coal. The former is used in power plants and the latter in the production of steel. Last year miners in Australia supplied 40 percent of the total coking imports and 57 percent of the thermal coal. It will be less in 2020 and a major decrease is on the horizon for next year also.

Beijing introduced a quota system several years ago to support its domestic mining industry. Until year's end, an additional 20 million tonnes is allowed into the country. Primarily Indonesia and Russia will benefit while Australian producers are likely to feel the brunt of Beijing's ire. According to the Guardian, 60 bulk carriers holding Australian coal are already stranded off the Chinese coast for between 4 and 24 weeks.   

Australia's strained relations with its most important customer couldn't have come at a worse moment. The country's economy has benefited handsomely over the past decades which recorded 28 consecutive years of growth. Even after the financial crisis of 2008 Australia's economy wasn't affected significantly such as the rest of the world due to China's building spree and insatiable demand for fossil fuels and iron ore. The Covid-19 pandemic, however, has brought to an end an unprecedented period in the country's economic history.

Canberra's acknowledgment of the necessity to reduce tensions can be seen in its attempts to start a dialogue with China. Australia's trade minister has reached out to his counterpart in Beijing, but apparently, no one is picking up the phone or calling back. The strong language from Canberra came at an especially sensitive moment as relations with the U.S. were worsening. Beijing interpreted the criticism as Australia doing President Trump’s bidding.

This caught the Chinese off-guard, but also presented an opportunity. From Beijing’s point of view their economic relations with Australia are unbalanced in their favor. While many products are imported from the island state, most can be easily replaced by products from other destinations. Australia, therefore, is far more dependent on China than the other way around. The opportunity has presented itself to make an example for others meaning trade relations come with a string attached: don’t interfere with internal matters.

By Vanand Meliksetian for Oilprice.com

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Leave a comment
  • Des Haskin on December 13 2020 said:
    Beijing can take australia down. And go down itself even further than australia leaving the world in a better place overall.
  • George Doolittle on December 13 2020 said:
    Certainly hasn't hurt the Australian economy in the least as prices for coal and iron ore have soared let alone now oil as well. Since the Chinese Yuan has been so strong and the US Dollar very weak the big beneficiary has been the United States as well. Canada has made for an odd "caught in the middle" situation as well...with of course Japan in dire need of all these resources "on the cheap" to compete with Russian and Chinese military assertiveness.

    Overlay all this with "The Covid-19" and no doubt there is a serious mess going on globally at the moment. Anyhow to reiterate the US Dollar is absurdly weak and given how little the USA is dependent upon "global trade" period for much of anything there has been a truly awesome bid in US equity and Treasury financial instruments as a result with not only online commerce "stuffed to the brim" with inventory that needs selling but now same said be true of brick and mortar as I think some form of "Covid-19 relief" from the nightmare of "lockdowns"(window-shopping as therapy.)

    Very odd situation no doubt.
    Certainly no major shareholders in Tesla are complaining.
  • Mamdouh Salameh on December 13 2020 said:
    That is the heavy price Australia is currently paying for foolishly doing President Trump’s bidding. It lost its biggest trade partner, China.

    Thanks God president Trump lost the elections. Another four years in the White House would have enabled him to wreak further havoc on the global economy and sew more division in the world.

    Since his election as president of the United States in December 19, 2016, President Trump imposed tariffs and sanctions on China, waged a trade war against it, tried to tamper with the status quo over Taiwan agreed upon in 1972 between the Nixon administration and China, meddled in Hong Kong’s affairs, blamed China for the COVID-19 pandemic and labelled it as the greatest threat to the United States security. Yet, China has been reportedly rooting for Trump’s re-election in 2020.

    The Chinese leadership’s strategic calculations have convinced them that the political and strategic damage Trump is inflicting on the United States and its allies outweighs any harm he may be causing Beijing. Another four years of Trump would have magnified that damage.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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