China-AU: Demand for Australian Resources is Still High

Summary

• The Australian mining and petroleum industry is a major contributor to Australian exports with China importing 62% of iron ore in 2019 from Australia.
• At present, China is recovering from the impacts of coronavirus pandemic and has intensified its demand for Australian iron ore, coal and LNG.
• With a heavy dependence on Australia for commodity imports, and with supply from Brazil stalled, a deteriorating Sino-Australian diplomatic relation may not harm resource demand arising from China.
• The resurgence of cases is not expected to limit mining operations, given the Australian mining sector had been operational during the entire lockdown period.

Mining and petroleum industry is one of the major contributors to Australia’s exports. Minerals, precious metals, meat and machinery, are some of Australia’s primary exports.

However, overall exports have taken a hit as the world economies strive hard to come out of the crisis occurred due to novel coronavirus (COVID-19) pandemic. Prices of most of the commodities have dropped, including that of energy, gold being an exception. The resurgence of cases due to relaxed lockdown after a brief phase of containing the virus has again led to shuttering down of many businesses in Melbourne for several weeks.

Amidst the grim economic milieu, country’s mining and petroleum industry have given a ray of hope in the revival of the country’s fragile economy. Keith Pitt, Australia’s minister for resources, believes that the industry is strengthening the country’s domestic economy, which is currently damaged.

China being the beckon of Light

Australia is witnessing record-breaking demand for its resources from China. China buys a third of Australia’s exports. In the year 2019-2020, China had imported 62% of iron ore from Australia.

At present, China is recovering from the impacts of coronavirus pandemic, and it has intensified its demand for Australian iron ore, coal and LNG. In 2020 Iron ore and LNG imports have surged considerably over 2019. Australian coal supply to China has also rebounded to where it was before the crisis.

As per media reports, Australia’s Department of Industry is set to release data revealing almost A$300bn worth of Australian mining and energy exports for 12 months to the end of June with iron ore exports as the contributing to ~A$100bn.

Australian iron ore producers like BHP Group Limited (ASX:BHP), Rio Tinto Limited (ASX:RIO) and Fortescue Metals Group Limited (ASX:FMG) are well posited to take advantage of the increased demand from China. The iron ore supply from Brazil is also on pause due to disruption caused by COVID-19, giving an edge to Australian miners.

With the high quality of products and reliability and efficiency of the resource industry, China may continue to buy Australian recourses.

Nonetheless, the Sino-Australian relations are currently a bit deteriorating with Australian Prime Minister, Scott Morrison asking for investigation regarding the spread of the virus in China. Also, the diplomatic relationship between Canberra and Beijing are on thin ice because of a political issue. To tackle the consequences of downward diplomatic relations, Australia is now looking at alternatives to provide new markets for its resources.

Also read: Recent Trends in the Resources Sector and Players Performance – OZL, OSH, IGO and S32

Deteriorating Sino-Australian relations and probable impact on trade

It is anticipated that the demand for commodities such as iron ore, coal and LNG would be damaged if the relation between Canberra and Beijing worsen more. Chinese media has been discussing a ban on Australian goods. With Beijing imposing trade sanctions on a few farm products such as beef and wine, Mr Pitt admitted prevailing fears of imposing sanctions on the resources industry too. In June, China amended screening regulations regarding iron ore imports that may affect the Australian iron ore imports.

However, China depends highly on Australia for iron ore. Placing restrictions on Australian iron ore could directly lead to stalling of infrastructure and construction projects as the cutback on iron ore would hurt their steel producers. Coastal Chinese steel producers depend heavily on Australia’s low volatile, low-sulphur premium and high-quality hard coking coals (HCCs). Prices for the HCCs from Australia are less expensive than the domestic cost of coal because of concerns over import quotas, making it a preferred choice for Coastal Chinese steel producers.

LNG export also remained in stable condition. LNG imports during May were at par compared to last year.

Finding an alternative to Australian supply will also be a challenge for China. Brazilian iron ore delivery is halted because of coronavirus pandemic. Plus, the rainy weather and 2019’s Brumadinho dam accident has put Brazil on the tight spot. Hence with no consistent and quality supplier alternative in place, China is holding on to Australia.

Also read: Upcoming Projects in Australia and Mining Equipment Market Opportunity

Australian stock market is also reflecting a promiscuous scenario – while BHP and Rio Tinto are trading at broadly pre-pandemic levels, Fortescue’s share price is at a record high.

Bottom-line:

Despite a deteriorating relation between China and Australia, China is dependent on Australia to meet its domestic need for Iron ore required to produce steel and other industrial goods. The Australian mining sector had been operational during the entire lockdown period, and the resurgence of cases is not expected to limit mining operations. Given the Sino-Australian diplomatic relations, Australia seems to be well posited to capitalize on the increasing resource demand from China.