PERTH (miningweekly.com) – Despite rising geopolitical tensions between Australia and China, Australian resource exports to the Asian major remain significant.

Advisory firm Wood Mackenzie (Woodmac) Asia Pacific vice chairperson Gavin Thompson says while import bans and tariffs have been mooted on Australian beef and wine imports into China, the demand for these products are ‘insignificant’ in terms of overall trade with the country, while iron-ore, coal and liquefied natural gas (LNG) exports make up the bulk of trade.

Despite the increasing war of words, Australia’s energy and natural resources exporters are in over-drive. As China recovers from the pandemic, demand for Australian iron-ore, coal and LNG is booming, with iron-ore and LNG imports up 8% and 9% year-to-date respectively versus 2019.

Chinese imports of Australian coal are way ahead of where they were before the pandemic, Thompson says.

He notes that China is highly dependent on Australian iron-ore, with around two-thirds of its imports coming from Australia, and with this supply making up half of all iron-ore consumed in China.

Thompson notes that if China placed restrictions on Australian iron-ore imports, it will hurt the Chinese domestic steel producers just as the Chinese government is directing stimulus into construction and infrastructure.

“Diversifying supply away from Australia will also be challenging. Brazilian iron-ore output remains disrupted by coronavirus plus wet weather and the fallout from last year’s Brumadinho dam disaster.

“We are forecasting a further 4% fall in Brazilian exports this year following a 13% fall in 2019. The halting of the Itabira complex last week as Vale strengthens Covid-19 controls highlights the downside risk. India, Russia and South Africa have increased exports, but only marginally,” Thompson says.

“Right now, Australian miners are operating at capacity and struggling to increase output. This is due to infrastructure and capacity constraints, not because of Covid-19 or trade barriers.

“China did amend some iron-ore import screening regulations at the start of June, introducing regulations that could be used to target Australian iron-ore. But given constraints on Brazilian supply I don’t expect this is the intention of these regulations. The market seems to agree: Fortescue’s share price is at a record high, while BHP and Rio Tinto are both trading back at broadly pre-pandemic levels.”

However, Thompson notes that punitive actions against Australian coal would be less damaging for power generators and steel mills in China, given that the country was more self-sufficient in its coal production.

Coal production is also more critical to the Chinese economy than iron-ore mines, with the government making efforts to restrict coal imports to support domestic mining activity.

“However, this is yet to show up in the numbers for metallurgical coal imports. Seaborne imports in the first four months of 2020 were 28-million tonnes, already more than half of the 52-million tonnes imported for the whole of 2019.

“Metallurgical coal imports are over 80% Australian sourced, and while being only a fraction of total demand, coastal Chinese steel mills rely heavily on Australia’s high-quality low volatile, low-sulphur premium hard coking coals (HCCs). And don’t overlook the arbitrage. Prices for the best HCCs from Australia are around US$116/t CFR (delivered) today: similar domestic coals cost around US$163/t. If anything, concerns over import quotas have pushed down seaborne prices, making Australian supply more attractive,” Thompson said.

As far as LNG exports to China were concerned, Thompson noted that at the initial outbreak of the coronavirus, LNG imports looked to be immediately vulnerable.

However, LNG imports through May this year were up almost 9% on the previous period, as demand recovered and Central Asian piped imports have fallen, while low spot prices were also helping.

“Australia’s market share slipped slightly in May, ironically dented by rising imports from the US, but still accounted for around half of all LNG imports. Moves against Australian LNG look an unlikely prospect given the scale and contracts in place,” he added.

Thompson concluded by saying that both Australia and China benefitted hugely from their well-established trade in iron-ore, coal and LNG, and that Australia has a large share of these import markets in China precisely because it is a reliable, competitive and trusted partner.

“All relationships go through their bad patches, but both sides would likely be worse off if the current diplomatic spat were to escalate further. Now is the time for cool heads, dialogue and pragmatism to prevail,” he added.