Australia-China trade tensions may remain despite RCEP

Australia-China trade tensions are unlikely to ease on the back of the Regional Comprehensive Economic Partnership (RCEP) agreement alone, but Beijing may selectively import certain Australian commodities out of necessity.

The RCEP , which involves 15 countries in Asia-Pacific including Australia and China with a combined GDP of $26 trillion, is designed to reduce tariffs and other trade barriers to encourage regional trade flows. Any immediate impact on commodity trade flows is uncertain but is likely to be minimal given existing bilateral agreements between countries that govern resource flows.

China has imposed an informal ban on Australian coal since April, sending Australian high-ash NAR 5,500 kcal/kg coal prices near historical lows after tensions between the two countries escalated when Canberra called for an investigation into the origins of Covid-19.

Beijing has largely refrained from making any official clarification on the ban, presumably to avoid violating its World Trade Organization (WTO) obligations. But Beijing could also adopt the same informal approach in restricting Australian imports under the RCEP framework if geopolitical tensions remain between both countries.

If Canberra cannot use the dispute settlement process in the WTO to regain access to Chinese markets, the signing of a relatively loose trade deal like the RCEP is even more unlikely to help smooth access.

With India refraining from joining, the RCEP could potentially be dominated by China. This may complicate the ratification process at the Australian parliament for RCEP, especially as rising anti-China sentiment has encouraged Canberra to take a tougher stance against Beijing.

A Chinese state-owned utility told Argus last week it was sceptical that the RCEP would have any meaningful impact on improving the access of Australian coal to China, given that existing free trade agreements between the two countries had failed to resolve the trade dispute.

"The Australia-China coal saga is not simply a matter of import quotas. Unless the Australian government fundamentally changes its attitude towards China, the situation will not improve," a Chinese trader told Argus .

Domestic supply tight But Beijing has been selective about which Australian commodities to restrict. Australian iron ore producer Fortescue Metals has secured iron ore deals worth around $4bn at a recent import fair in Shanghai, according to market participants. But many Chinese coal consumers who attended the same import fair told Argus they were verbally warned by Beijing not to sign any term contracts involving Australian coal.

This is because China needs Australian iron ore to sustain its booming steel industry, with Australian supplies accounting for the bulk of China's iron ore requirements. But China could theoretically use domestic coal and raise imports from South Africa, Colombia and Russia to replace coal of similar quality that it buys from Australia.

China may need to re-evaluate whether to continue restricting Australian coal with the peak winter demand season looming. NAR 5,500 kcal/kg coal from South Africa, Colombia and Russia may have higher trace elements such as fluorine compared with Australian product, making imports from these countries unsuitable for some Chinese consumers. In addition, the substantially higher costs compared with Australian material have deterred spot purchases by some utilities, with China's intake of seaborne coal unusually low for this time of year.

Domestic production in China has also not risen fast enough ahead of the winter season to compensate for the fall in imports . As a result, prices of domestic NAR 5,500 kcal/kg coal sold on a fob Qinhuangdao basis have soared well above the government-set upper limit of 600 yuan/t ($91.70/t).

But it may not be a straightforward matter to assume that Beijing will import Australian coal out of necessity. Beijing may instead press Canberra for concessions on its policy regarding imports of Chinese goods. As a result, the showdown could take some time to play out for Australian coal.

By Kelvin Leong

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