By Ulf Bergman
When one thinks that things can not get much worse, there is usually considerable scope for matters to deteriorate even further. The Chinese government announced today that it is indefinitely suspending all activities under the China-Australia Strategic Economic Dialogue, which puts further strain on the already fractured relationship between the two nations. While the development is essentially symbolic, ministers have not convened under the scheme for almost four years, it probably serves as a strong indicator that any immediate rapprochement between the two countries should be seen as highly unlikely.
While Australian exports of iron ore to China look safe, for now at least, it is not hard to imagine that Chinese buyers are being encouraged in the current climate to source as much as possible from alternative suppliers. Until the Chinese led developments of new mines in West Africa are operational, there is only Brazil that can potentially supply any additional and meaningful quantities to a consumer of China’s magnitude. The Brazilian iron ore output has been plagued with problems in recent years, with accidents and severe COVID19 outbreaks having had a considerable negative impact on volumes. However, Brazilian mining giant Vale is expecting its production to recover later in the year, after reporting disappointing production growth in the first quarter, and expects an annual output of between 315 to 335 million tonnes. Data from Bloomberg also suggest that the company will account for 83 per cent of the global supply growth this year. Hence, there is the potential for some of the flow of iron ore from Australia to China to be diverted to the longer voyages from Brazil, which will no doubt be greeted with open arms by owners of large dry bulk vessels. Australia’s stated willingness to weaponise its iron ore exports in the case of a conflict in the South China Sea is also likely to serve as an incentive to many Chinese buyers to diversify their sources.
The continued deterioration of the bilateral relationship looks set to cement the current disruptions to many trade flows, with several nations now vying to replace the banned Australian imports of coal and grains, among other things. In Argentina, which has close political ties with China, farmers are set to increase their barley plantings by 28 per cent this year in the hope of taking a large part of Australia’s previously dominant market share in China. The growers of Argentina usually compete with the Australian ones for a share of the global wheat trades, while sending their barley to Saudi Arabia and other parts of the Middle East. However, the Argentinian government are looking to increase wheat export taxes, making barley a more attractive proposition for the nation’s farmers and adding additional distance to the export voyages.
As mentioned in Ocean Analytics’ previous Insights contribution, the number of vessels heading to Chinese ports with Australian coal has been reduced to virtually zero. At the same time, Indonesia, Russia and the US have increased their shipments of coal to China. With one of their main markets off-limits, Australian coal miners have been forced to find alternative markets for their output. While exported volumes have declined somewhat in the first four months of the year compared to the same period in previous years, the damage is not quite as severe as expected. Exports to other Asian nations have increased and made up for parts of the shortfall created by the Chinese import embargo, with data from Oceanbolt indicating that India, Japan and South Korea are increasing their purchases of Australian coal.
It has often been said, trade disruptions and inefficiencies are frequently good news for the shipping sector, with cargoes having to travel further afield and tying up tonnage for longer. The diplomatic positions between China and Australia look rather entrenched and a solution does not look forthcoming. Trade flows between the two countries look set to remain under pressure for the foreseeable future and, given the volumes of dry bulk cargoes involved, it will lend support to the already high freight rates, as the alternative, and often more distant, sources and markets are developed.