In this note we use data from various sources including ABARE; ABS; and RBA.
China is Australia’s largest trading partner.
Last year Australia’s exports of goods and services to China were valued at around $150bn.
Two key developments will impact the future of Australia’s exports to China.
Firstly, the shock to global demand for commodities and services (particularly around foreign travel) is creating oversupply with some inevitable stress being placed on traditional trading relationships.
Secondly, China’s trade and industry policies in this current uncertain world will be key to the outlook.
Arguably, the most obvious risks for Australia in this context are around the $50 billion of exports associated with coal; agriculture and services.
Australia’s exports to China are dominated by resources and energy.
Australia’s resources and energy exports to China include iron ore ($65 bn); metallurgical coal ($10 bn); thermal coal ($7 bn); LNG ($18bn); gold ($5bn); copper ($4 bn); and other, including zinc, lead, nickel and lithium ($5bn).
Agricultural exports to China are: meat ($3.6bn); total grains; ($1,1bn); wine ($1,1bn); seafood ($0.9bn); wool ($3.2bn); cotton ($0.9bn); dairy ($0.9bn); horticulture ($0.9bn) and other crops & products ($0.9bn). Last year, Australia’s agricultural & seafood exports to China were valued at $13.5bn, 9% of our total exports to China.
Services are also an important export to China. Australia’s total service exports of $100bn, annually, include education ($40bn); tourism ($26bn); and business services ($28bn).
China represents 33% of our education exports ($12bn); 18% of tourism exports ($4.7bn); and 4% of business services exports ($1.1bn).
The broad make up of Australia’s exports to China is 72% (resources and energy); 9% (agriculture) and 12% (services), as well as 7% across manufactured and other goods (including confidential items).
In addition, China has exerted a major impact on Australia’s housing market through purchases of residential properties.
Recently we have seen considerable controversy around the Australia – China trade relationship.
China has imposed a five year 80% tariff on Australia’s exports of barley.
Last year Australia exported $0.9bn in barley to China. This represented 50% of Australia’s total barley exports and 44% of China’s imports of barley.
Barley has represented around 0.6% of Australia’s total exports to China.
Our reliance on China varies across agricultural products. While these ratios vary from year to year a reasonable snapshot is that China takes 76% of Australia’s wool exports; 36% of wine exports; 35% of cotton exports; 28% of dairy exports and 18% of beef exports. Other agricultural exports are less reliant on China and are therefore proportionately less exposed to a China policy shock.
However, other issues, including ease of access; quality differentiation from other suppliers, and China’s commitment to supporting its domestic industries are important. For example, while Australia is the world’s largest wool exporter with 25% of the market it enjoys a clear advantage over other suppliers for its quality. Nevertheless the recent collapse in the wool price associated with the Covid-19 related fall in demand points to risks for Australian wool suppliers given the high reliance on China and the likely excess supply in global markets. China’s policies to support their own domestic suppliers in a world of falling prices and over supply will be important for that industry.
Australia is only the fifth largest exporter of wine in the world with a disproportionate exposure to China (36%) compared to the next largest buyers USA (14%); UK (12%); and Canada (6%). However the wine industry has successfully developed a premium reputation in the Chinese market which will certainly provide some protection of its market share.
Furthermore, while China is not such a dominant buyer of Australia’s beef exports (around 20% of total sales) there have been recent disruptions to the relationship with bans on four abattoirs over alleged compliance issues covering up to 35% of Australia’s beef exports to China. This is a good example of how trade and industry policy can significantly impact our agricultural markets.
Overall, Australia’s exports of agricultural goods to China represent around 28% of our total agricultural exports. This proportion has increased from 9% ten years ago, highlighting the rapid increase in Australia’s reliance on China for its agricultural exports. This average ratio masks considerable differences across agricultural products in their exposure to the Chinese market.
Our most important export by value is iron ore. Australia enjoys virtual oligopolistic power over the global iron ore market. In terms of seaborne traded iron ore Australia controls 48% and Brazil explains 27%. China buys around 75% of the world’s seaborne iron ore. Further, with a clear cost advantage in both the seaborne market and over the domestic Chinese market Australia is well placed on a quality adjusted basis. Such advantages point to Australia’s strong position for maintaining volumes in the event of an unexpected shock to demand.
RIO; BHP; and FMG have disciplined approaches to cost management reaching a profitable balance with China’s demand. In turn China’s demand is dominated by construction – infrastructure; housing; and commercial property. The Chinese authorities are initiating ambitious construction programs to stimulate the economy in the face of the shock from Covid-19. These markets will be resilient to any trade related shocks.
Recently the iron ore price has actually lifted by nearly 20% over the month. Australia’s major competitor in this market, Brazil, has experienced difficulties in maintaining production levels as its production processes have been impacted by the Covid-19 crisis.
Australia has a dominant position in the seaborne metallurgical coal market with around 50% of the market. Other major exporters are US; Russia; and Canada.
Around 45% ($10.5 bn) of China’s metallurgical coal imports came from Australia representing around 23% of Australia’s total metallurgical coal exports. Other countries taking Australia’s metallurgical coal are India (around 26%); Japan (18%); South Korea (9%) and Taiwan (6%). China also has its own supplies of metallurgical coal and appears to be committed to supporting that industry.
As metallurgical coal is a key element in steel production and prospects for steel production in China are solid (see above) we should, theoretically, be comfortable that Australia’s metallurgical coal exports to China can hold up. However, Australia has been slow to adjust production volumes and costs to tumbling prices (down 30% from the recent peak), and over-capacity has built-up in steel in other countries such as US; Russia and India. As US and Russian coal producers, and Indian steel producers who no longer require the stock piles of coal, look to other markets China’s support for Australian metallurgical coal could be tested.
China imports only around 12% of its total metallurgical coal of which 70% is the SB premium coal from Australia. Domestic supplies of this type of coal are, for now, in short supply although foreign substitutes are available. Despite this short supply there have been instances of metallurgical coal being blocked in the past. Relative price movements and oversupply add to the risks in this market.
Thermal coal carries even more risks. Australia has around a 20% share in the traded market for thermal coal. Other major participants are Indonesia (around 40%), Russia (15%) and Colombia/US/South Africa/other (25%). China imports around 25% ($7bn) of Australia’s thermal coal exports. The collapse in energy demand due to the Covid-19 crisis has fallen heavily on coal. The International Energy Agency is forecasting an 8% fall in coal production in 2020 – the largest fall in history.
Unlike Australia’s major markets which include Japan (around 45%); Taiwan and South Korea, China has the capacity to produce 100% of its needs. As with metallurgical coal China only imports around 10% of its thermal coal requirements and has invested in improving efficiency, safety and output of domestic production. With the demand for thermal coal under pressure, particularly in developed economies, and China having such a dominant presence in its own market Australia’s exports of thermal coal to China will continue to be subject to uncertainty.
Domestic industry policy; trade tensions and collapsing prices (down 20% this year); historical evidence of blocked markets, create risks for the outlook for thermal coal.
LNG volumes are sold on long term contracts (with prices indexed to the oil price). Global demand for LNG is widely dispersed with Japan; Korea; Taiwan; all providing markets for Australia’s LNG. China buys 35% ($17bn) of Australia’s LNG. Australia enjoys a strong position in this market with a competitive cost base and an energy product that will benefit from the structural global move to clean energy.
For the near term, however, the recent lift in global LNG output will keep the market oversupplied although there should be little risk that current existing long term contracts will not be honoured.
Last year China’s students represented 30% by number and 33% by value of education exports. Universities have rapidly expanded capacity to accommodate Australia’s booming education export sector.
For tourism, China represented 14% by number but 18% by value of foreign tourism, reflecting a higher average rate of spending.
China has been the fastest growing user of Australia’s education and tourism exports.
In 2020 both sectors have been decimated by the Covid-19 crisis.
Various reports indicate that in 2020 Chinese student numbers are down by 20-30% (beginning with travel restrictions from China to Australia) while all foreign tourism has been curtailed. In 2019 education exports to China were estimated at around $13bn while Chinese foreign tourists generated around $5bn.
Prospects for a near term recovery of foreign tourism (outside New Zealand) are dismal. Industry insiders are not anticipating a freeing up of overseas borders for at least one year.
Issues around foreign students are complex. Those currently in Australia may be attracted to returning home given the collapse in part time job opportunities; on the other hand Australia’s outstanding success in containing the virus may encourage students to stay. One prospect is that graduating students returning home are unlikely to be replaced by a new cohort given travel restrictions.
China has played an important role in housing demand and immigration.
The Prime Minister recently forecast an 85% reduction in immigration in 2020/2021 compared to the 2018/19 levels.
That estimate looks too high but it is clear that immigration’s role in boosting Australia’s growth rate will be severely curtailed.
Chinese investment was a critical driver of housing construction activity out to 2016. A combination of Chinese domestic controls to stem capital outflow and consolidate foreign reserves; aggressive tax policies from Australian states against foreign investors (higher stamp duty; occupancy taxes) and recent official policies to boost housing construction in China have all flattened Chinese involvement in Australia’s residential property markets. Prospects for any return to remotely what we saw from China in the lead up to 2016 seem slim.
Foreign Investment Review Board data indicates that foreign investment in Australia’s residential property market has slowed from around 15% of new lending in 2016 to a steady 2% in recent years. Other private data confirms the reduced importance of foreigners in Australia’s residential property market.
The slowdown in Chinese investment in residential housing was largely due to policy commitments in China to stabilise the depletion of international reserves. However the authorities supported the growth in services imports – including travel and education. Policies to boost domestic travel and education services are likely to gain traction in future years and countries like Australia will need to be aware of this longer term risk.
The shock to demand resulting from the Covid-19 crisis coupled with Chinese trade and industry policies will interact to determine the full impact on Australia’s $150 bn exports to China.
The sources of exports that are most likely to be vulnerable to these forces total around $50 bn – coal ($17 bn); agriculture ($13 bn) and services ($18 bn).
China imports only around 10% of its thermal and metallurgical coal requirements. Prices have recently fallen by 20-30% and the world is facing over supply. There have been some suspicions in the past of China blocking coal imports. China has also demonstrated a specific commitment to supporting its domestic coal industries.
China has risen quickly as a market for Australia’s agricultural exports now explaining around 28% of total agricultural exports. Recent experiences with barley and beef have raised concerns ; we cannot rule out further actions in the face of global over supply; and targeted industry and trade policies.
Australia has benefitted significantly from the substantial growth in the services sector. China’s own interest in boosting its domestic education and tourism industries is well known. The impact of Covid- 19 related travel restrictions will compound Australia’s challenge to restore its services exports to China.
We should not be complacent about the future of the remaining $100 bn of exports, which are dominated by resources and energy. Iron ore; LNG; gold; and base metals are all benefitting from China’s continuing development demands. For those exports we expect that Australia’s long term success in those sectors is much more likely to be protected from the global demand shocks and domestic industry and trade policies.