Editorial: Souring Aussie-China relations puts coal in the crosshairs

Relations between Australia and China have been strained since Prime Minister Scott Morrison called for an independent global investigation into the origins (and initial handling) of the coronavirus pandemic. The conservative leader has also criticized China’s recent imposition of new security laws in Hong Kong and suspended its extradition agreement with the former British colony, which reverted to Chinese rule in 1997.

Beijing isn’t happy. Earlier this year, China imposed an 80.5% tariff on Australian barley imports, imposed restrictions on some wine and meat exports, and told Chinese students and tourists to refrain from travelling to Australia because of what it described as racial discrimination there.

More recently, China in August detained Cheng Lei, an Australian citizen (born in China) and television host for China’s CGTN English-language television service on allegations of national security crimes. In September, two Australian journalists, Michael Smith, The Australian Financial Review’s correspondent in Shanghai, and Bill Birtles, the Australian Broadcasting Corporation’s Beijing correspondent, fled the country after being interrogated about Cheng Lei by Chinese state security agents.

But the tensions were seeded two years ago, when Australia became one of the first countries to ban Chinese technology companies Huawei and ZTE from supplying its national 5G network.

The souring relations appear to have escalated this week, with initial reports from S&P Global Platts and Argus Media that Beijing has instructed some of China’s steel mills, power companies and coal traders to stop importing Australian coal. By some estimates about 27% of Australia’s metallurgical coal and 20% of its thermal coal is exported to China.

News agencies picked up the story and on Oct. 13 Australia’s Trade Minister, Simon Birmingham, said he was looking into the matter. “We take the reports seriously enough certainly to try to seek assurances from Chinese authorities that they are honouring the terms of the China-Australia Free Trade Agreement and their World Trade Organization obligations,” Birmingham told reporters. But the trade minister also acknowledged that it could be a routine adjustment by its largest trading partner. “We do know from recent years that there are certain cyclical patterns to the way in which China has managed coal importation, and this may be another case of that.”

A few days later, one of the country’s leading newspapers, The Sydney Morning Herald, reported that mining heavyweight BHP had confirmed that it was aware of the rumours and was investigating. “BHP’s commercial team has received requests for deferral of contracted coal cargoes from some of its buyers in China, the company said, and is seeking further information on the extent of the new import restrictions,” the newspaper reported. It also quoted BHP Chairman Ken MacKenzie: “We have long standing relationships with our customers in China. We are working with them to understand the situation more comprehensively.”

According to Reuters columnist Clyde Russell, China’s imports of all coal from Australia in September totalled 5.48 million tonnes, a drop from August’s 6.04 million tonnes and July’s 8.17 million tonnes. But Russell also pointed out that while Australia’s coal exports to the Asian juggernaut have fallen by 7.3% year-on-year to 67.68 million tonnes in the year to date, Indonesia’s coal exports to China have dropped by 17% year-on-year to 86.63 million tonnes in the first nine months of the year.

If the ‘unofficial’ curtailment of Australian coal exports turns out to be true, however, it will hurt. Australia is China’s top supplier of coking coal to make steel. According to BMO Capital Markets, Australia exported 183 million tonnes of metallurgical coal last year, with 43 million tonnes, or 23%, going to China. That made up 41% (31 million tonnes) of China’s total coking coal imports of 75 million tonnes.

And while there are other markets in the region that can take Australia’s coal such as Japan, India and South Korea, those economies are still reeling from the pandemic. China’s economy, by contrast, seems to be on the mend.

“With 2020 set for another year of China’s consumption growing and ex-China struggling, China will now account for over 50% of steel, copper, aluminum and nickel consumption for the first time,” Colin Hamilton, an analyst at BMO Capital Markets in London, commented in a research note.

Whatever happens, many Australians appear to be unhappy with their largest trading partner. A survey of Australians by the Pew Research Center, released on Oct. 6, concluded that “’unfavourable’ perceptions of China rose to 81% in 2020 — up  24% since 2019,” according to Stratfor, a geopolitical intelligence group.

“Politically we’re at the lowest ebb since diplomatic relations were established in 1972,” James Laurenceson, director of the Australia-China Relations Institute at Sydney’s University of Technology, told the British Broadcasting Corporation.