China announces 'indefinite suspension of activities' under Strategic Economic Dialogue with Australia

China’s state planner the National Development and Reform Commission (NDRC) announced today an “indefinite suspension of all activities under China-Australia Strategic Economic Dialogue”. Wood Mackenzie experts weigh in on the event.

Senior economist Yanting Zhou said: “The China-Australia Strategic Economic Dialogue is a window for senior members of the two governments to communication and discover opportunities for cooperation in infrastructure, energy and resource, industrial and financial sectors. There are no specific projects related to the natural resource sector under this framework.

“However, China’s announcement to suspend activities under this framework indicates an escalation of the China-Australia political dispute. This dispute will continue to impact the commodities sector in the follow areas:

- Discourage Chinese investment in Australia’s natural resource sectors.

- Import bans of some of the commodities will remain in place until China-Australia relations improve.

- China is unlikely to ban imports of Australian commodities which they rely heavily on as it will impact the domestic economy. Iron ore is one example. The government is more likely to raise the administrative cost for importing commodities from Australia if they want to take action.

“Given the strong position that the Chinese government is demonstrating and the Chinese economy’s manageable reliance on Australian supply, it is unlikely to back down before the Australian government does.”

On thermal coal, principal analyst Shirley Zhang said: “The ban is already in place and has affected trade flows and seaborne prices over the past six months. It is hard to define the impacted timeframe of the “indefinite suspension” at different negotiation stages. Our current (April) base case assumes the impact on thermal coal will linger through 2022.”

On copper, research director Gillian Moncur said: “Chinese smelters remain closed to concentrates from Australia, with the unofficial ban affecting trade from Q4 2020. Smaller quantities of concentrate imports were reported in both October and November. However, from December onwards imports were recorded as “zero”, compared to a peak of 108 Kt in June 2020.

“We estimate that the annual volume impacted is around 1.0 Mtpa of copper concentrate, which is looking for homes in other Asia Pacific smelters.  This has resulted in China looking for concentrates from elsewhere, at a time when the market was very tight due to weather related issues, deferring shipments etc.,.”

Verisk Maplecroft principal analyst Kaho Yu added: “Suspension of activities under the China-Australia Strategic Economic Dialogue indicates that trade tensions will remain a friction point in their bilateral relations.

“The two countries are locked in a cycle of tit-for-tat policy action against each other. While Beijing will likely continue to impose administrative restrictions on imports from Australia, Canberra will also likely tighten restrictions on Chinese investment, especially in sensitive sectors.

“Any ban will be most effective when wielded against commodities in which China has a diversified import profile, and the target sector is heavily dependent on the Chinese market.

“However, their deteriorating bilateral relations will likely drive Beijing to diversify supply away from Australia, especially of resource commodities it sources primarily from the latter.”