Thursday 28th May, 2020

How does China’s infrastructure boom benefit Australian bulk handling?

Australian trade with China is vital for the local bulk handling sector, but have recent events begun to put strains on the relationship?

Australian trade with China is vital for the local bulk handling sector, but have recent events begun to put strains on the relationship?

China is Australia’s top trade partner, buying $123.2 billion worth of Australian exports in 2017-18.

According to Australian Government’s Department of Foreign Affairs and Trade (DFAT), an entire third of Australia’s exports head towards China. In 2017-18, China imported more than $50 billion worth of Australian iron ores and more than $13 billion worth of coal in 2017-18.

This massive demand for Australian resources can be partially explained by China’s transitioning economy. Alice de Jonge, a Senior Lecturer in International Law and Asian Business Law at Monash University, says China is shifting away from an export-led economy to focus on domestic consumption and developing infrastructure.

“After the global financial crisis in 2008, China began to pump massive amounts of investment into construction, meaning it needs a similarly large amount of steel to build its ambitious infrastructure projects and cities,” she says.

Manufacturing is no longer the centre of China’s economy, partly because workers are no longer willing to accept extremely low subsistence wages as the cost of living grows, Dr de Jonge explains. Instead, the country has become a source of overseas investment.

Infrastructure has been a focus across China and abroad since 2013, when President Xi Jinping announced the One Belt, One Road initiative. The initiative aims to connect Europe, Asia, Africa and Oceania through overland and maritime routes such as railways, roads, ports, energy systems and telecommunications networks.

But to build these infrastructure networks, China depends on a constant supply of raw materials.

Professor James Laurenceson, Acting Director of the Australia-China Relations Institute at the University of Technology Sydney, says it’s difficult to find two national economies that are more complementary than Australia and China.

“Australia is one of the world’s lowest cost producer of high-quality bulk commodities. While China has domestic sources of iron and coal, it often costs more and the materials are usually of lesser quality than what we produce,” he says.

China is in the midst of a long industrialisation process. While it is currently the world’s largest producer of steel, most of it is used domestically to build cities, bridges, roads and other vital infrastructure. 

Professor Laurenceson says that this is likely to continue for a long time and Australia is very well placed to supply China with the raw materials it needs.

“Australia’s relatively low population means its mining industry relies on being able to access and sell to larger economies as there isn’t enough demand for it at home,” he says.

However, while exports to China accounts for around seven per cent of Australia’s gross domestic product, the relationship between the two countries has begun to strain.

In 2017, Foreign Minister Julie Bishop said during a speech delivered at the International Institute of Strategic Studies in Singapore that China would not achieve its full economic potential unless it embraced democratic principles.

In her speech, she made reference to the growing competition China presented to the United States, politically and economically.

“This brings with it its own challenges, not least because China is disputing maritime boundaries in the East and South China Seas, as do a number of South-East Asian countries with respect to the South China Sea,” Ms Bishop says.

Politically, Australia is a major security ally of the United States. However, US President Donald Trump’s America-first policies and trade tariffs with China have placed Australia in an awkward situation.

“The trade war is being waged outside World Trade Organisation (WTO) rules, which should be a worry for us as we are a lot smaller than both of those economies,” Professor Laurenceson says.

“WTO trade rules protect our interests, so we depend on them significantly,” he says.

In addition, Professor Laurenceson says there is a chance that the US could pressure Australia to take a certain stance on particular issues relating to China.

In 2018, Australia announced Chinese company Huawei would be banned in the Australian rollout of the 5G network. Additionally, China was also singled out by then-Prime Minister Malcolm Turnbull when introducing new foreign interference laws.

The announcement was followed by news of the northern Chinese port of Dalian banning imports of Australian coal, with a cap on overall imports at 12 million tonnes a year in February. The news of the ban saw the Australian dollar fall by one per cent.

Professor Laurenceson says claims of economic levers being used for political means in Chinese ports against Australian exporters struggles under closer inspection.

“For one, there is no evidence the Federal Government would modify its stance. If they had rolled over and capitulated, it would just invite China to take similar actions more frequently,” he says.

“China doesn’t buy Australian bulk exports because it loves us. We simply have the best priced resources, meaning they would be shooting themselves in the foot if they didn’t.

“It’s also easy to forget that from China’s perspective, it is acutely vulnerable to supply stops given its dependence on world market for resources, from oil to liquefied natural gas to iron ore. This would make it think twice before lashing out to punish Australia, a large and reliable bulk commodities producer.”

Professor Laurenceson explains the key for Australia’s bulk commodity producers is to continue to foster this reputation for quality, price and reliability. This could provide stability to trade ties, even when political disagreements arise, and mean minor irritants like temporary delays at Chinese ports don’t become something larger.

Bulk commodities producers can also benefit from the experience of Australian exporters of wine and beef. Last year there were reports of these goods being struck by delays at particular Chinese ports, possibly stemming from political tensions. Yet Professor Laurenceson notes that the end result was that wine and beef exports still recorded rapid growth overall.

The overall general outlook for trade remains positive. Mining exports to China are up six per cent compared with a year ago and Professor Laurenceson says Chinese steel production, and therefore demand for iron ore, won’t peak until around 2025.

“There is a positive future, but our politicians will need the fortitude and diplomatic skill to navigate this vital economic and political relationship.”