If ever a metaphor for the deteriorating trade relationship between Beijing and Canberra was needed, the news that tonnes of live Australian lobster worth millions of dollars were stranded and slowly dying at a Chinese airport has provided it.
Australian industries have already suffered multiple trade strikes from China in 2020 and there are fears that the list of affected industries will just keep growing. That is a significant concern, since China is Australia’s largest trading partner and biggest export destination. The two-way relationship between the countries hit $252 billion in 2019.
In November, it has emerged that some Chinese importers were telling Australian exporters that their goods would not clear Chinese customs from Friday, November 6 onwards. That advice by Chinese importers was prompted by unconfirmed instructions from Chinese customs authorities that threatened to ban Australian copper, coal, barley, wine, sugar, lobster and timber from November 6. The official line from China’s Foreign Ministry was that it was not increasing pressure on Australian exporters to win diplomatic concessions, with a spokesman saying China conducted “friendly co-operation with other countries based on mutual respect”.
But that is cold comfort for local producers, many of whom rely heavily on the Chinese market. So, why is China cracking down on Australian exports? And how could this affect the Australian economy?
What products do we send to China?
China’s insatiable appetite for Australian minerals has been one of the biggest drivers of economic growth over the past two decades. Australia exported $84.8 billion worth of iron ore, a key steel-making ingredient, and $13.93 billion of coal (both metallurgical and thermal) to China in 2019-20.
Minerals exports dwarf everything else, but the surge in sales of agricultural products to China over the past decade has been nothing short of phenomenal. It has been underpinned by rising incomes in China, Australia’s reputation for high-quality produce and a free trade deal between the two nations.
Thousands of Australian companies are sending off everything from almonds to animal skins, sugar, vegetables, cotton and infant formula to China. China overtook another Asian powerhouse, Japan, as our number one agriculture export market in 2011-12, when exports were valued at $6.7 billion. Total Australian agricultural exports to China hit a record $13.565 billion in the 2019-20 financial year, according to the federal department of agriculture, which was more than triple the value a decade earlier in 2009-10, of $3.67 billion.
A large part of Australia’s export trade with China consists of goods that have been processed, improved and packaged, generating better returns. “China has enabled us to start rebuilding a value-add business, which is a unique feature of the opportunity there,” says Tim Hunt, head of research for agricultural banking specialist Rabobank. “Most markets, historically, have wanted us to ship the ingredients there, and they add the value.
“China places such value on the safety and quality of our products that they’re willing for them to be packaged in Australia and sent into their market … The vast majority of wine we send to China is bottled, branded wine, not unbranded bulk wine of which we sell a lot for example, to the UK,” he says.
Our reputation for safe, high-quality food is reinforced by tourism, Hunt says, with hundreds of thousands of Chinese tourists coming to Australia each year (pre-COVID) “seeing the quality of the food we eat, seeing the quality of the air and water in this country, and going back believing that this is a place where very good food comes from”.
And yet there is acute nervousness among our food-related export industries that the diplomatic tensions between the two nations will result in more trade restrictions.
How did we get here?
Six months ago, China’s ambassador to Australia, Cheng Jingye, warned that Australian beef, students, tourists and wine could all be vulnerable to trade strikes. Cheng’s warning suggests he is either a modern-day Nostradamus, or possesses extremely good intelligence, because in the period since all four sectors have been hit.
The comments have been widely interpreted as a response to Australia’s push for an independent inquiry into the origins of the coronavirus, first voiced in April by Foreign Minister Marise Payne. China took the move as an affront.
In May, China suddenly suspended imports from four large Australian red meat abattoirs, with a “technical infringement” related to the labelling of the products exported from the abattoirs.
And in August, China’s Ministry of Commerce announced an investigation into Australian wine that will study whether Australian winemakers “dumped” their product in China at reduced prices over a five-year period. Less than two weeks later, China’s Ministry of Commerce confirmed a second investigation into Australian wine, examining federal and state subsidies to the industry.
Some of the tensions in the diplomatic relationship predate the coronavirus. Australia’s decision to ban Chinese telco Huawei from Australia’s 5G mobile network and a controversial new Australian law that aimed to crack down on foreign interference in Australian politics both upset Beijing. But 2020 has taken the tension to a whole new level, with Cheng’s prescient pronouncements about potential risks to Australian exports a major turning point.
Events have now extended further than Cheng’s earlier warnings. He didn’t mention cotton or lobsters, but both have been hit since. Australian cotton was hit in October, with Chinese mills told to stop using the Australian fibre. Chinese processors were told that they would have their import quotas cut if they continued importing Australian cotton.
While this move has a long way to play out, it’s a worry for the Australian cotton industry, which can generate more than $2 billion in revenue from China export sales in a year of good conditions.
How has the wine industry responded?
No country sends more wine to China than Australia, which lists more distributors of wine to China (2900 in 2019) than it does wineries on its own soil (2700). According to industry body Wine Australia, our wine exports to China jumped 12 per cent in 2019, to a record $1.28 billion for the calendar year, with the rise cementing our position as the top exporter of wine to China with a hefty 35 per cent market share, ahead of France on 29 per cent.
For Australian companies such as Treasury Wine, the nation’s biggest wine producer, China has been the bedrock for growth, with Chinese consumers developing a rich enthusiasm for its red wines, in particular, including those carrying the famous Penfolds label.
ASX-listed Treasury does not separate out its China sales figures, its exports to China contained under the broad “Asia” banner. But China is a huge part of its Asia sales and the company has a network of about 200 people in China spruiking its brands, distributing its wine and protecting its intellectual property.
In 2018-19, Treasury’s revenue in Asia jumped a hefty 36.8 per cent to $748.9 million, a pleasant-tasting result for the palate of any exporting business.
Of course, the most recent financial year delivered something of a reality check, with Treasury’s Asian revenue down 14.5 per cent, with sales hit in the March quarter in particular by government mandated restrictions across the region designed to stem COVID-19.
Tony Battaglene, chief executive of Australian Grape and Wine, says the introduction of a free trade agreement about five years ago has been pivotal to our export success in China. “We’ve doubled the value of exports since CHAFTA (China Australia Free Trade Agreement) was introduced. There was dramatic growth,” he says.
“The other thing that people don’t realise is that we’ve got a very large expatriate Chinese community in Australia, and a lot of those people jumped on the bandwagon and became traders. They didn’t have vineyards, they didn’t have wineries, but they had contacts in China. So they bought in either grapes or wine … got a contract made and exported under their brands. So that’s been a major part of the export success, it’s not just the general wine companies,” he says.
This phenomenon hasn’t happened in any other major wine exporting nation. Battaglene acknowledges that Australia has a lot to lose if the diplomatic tensions between the nations lead to major restrictions on our wine exports.
“It’s our best market by a long way, it’s our highest price point market and so to try and diversify to other markets if things go south would be very difficult,” he says.
How do barley producers plan to pivot?
Australian grain farmers have in recent years often toasted China over a cold beer at harvest time, grateful for China’s surging demand for our barley including malt barley, which is turned into malt to make beer, and feed barley for livestock.
In 2017-18, Australia exported $1.54 billion of barley to China, more than five times the total for 2009-10, of $280 million. More recently, the value of barley exports to China has been hit by drought but, at $917 million in 2018-19, it was still far above the levels of a decade earlier.
Some of the exporters of Australian barley to China in recent years include the Western Australian-based cooperative CBH, major international grain player Glencore, and the ASX-listed GrainCorp.
But in May, China followed through on threats to hit Australian barley with tariffs of up to 80.5 per cent.
Imposition of the tariffs was not a huge shock to the industry, given that China initiated an investigation in 2018 into whether Australian barley had been dumped in China at prices below the cost of production. But after a long period of growth in the relationship, it is proving a tough break-up.
Asked what impact the tariffs will have on Australian barley exports to China, Victorian grain grower Brett Hosking says simply: “It will stop them.”
The lost opportunity in China cannot be easily replaced, Hosking says, so the industry is looking at whether South American markets can replace the China market.
Hosking, also the chairman of the farmer group GrainGrowers, says China’s huge appetite for Australian barley has changed the way farmers farm.
“In that time, we’ve refined and developed the varieties we grow, the management and the export criteria to meet the demand for the Chinese market, because they have been such a good customer and such a reliable customer,” he says.
“China has been the top of the market, they’ve paid more for both feed and malt barley than any other country. And they’ve been a volume buyer.”
In May, just days before China confirmed the tariffs, GrainCorp boss Robert Spurway said the tariffs had no basis. But he played down any potential impact on GrainCorp, saying other parts of Australia exported more barley to China than the east coast, where GrainCorp operates. Western Australia, for example, is a substantial supplier of barley to China because of its large cropping region and its smaller domestic grain market.
Are beef exports at risk?
In China, there has been a symbiotic relationship between two of our key agricultural exports: in restaurants that stock high-quality Australian beef, Australian wine is often also available and popular. Wine might generate hefty returns for Australian winemakers, but the dollars earned from Australian beef exports are even bulkier. In 2009-10, Australian beef and veal exports to China were a paltry $27.6 million; in 2019-20, they hit a massive $2.83 billion.
When China suspended four Australian abattoirs from processing beef for China in May, the move affected ASX-listed beef business Australian Agricultural Company, better known as AACo. The company, which has a herd of about 350,000 cattle and is the nation’s biggest landholder, was caught in the stoush because one of the abattoirs had been processing its beef.
Last financial year, China accounted for about 15 per cent of the company’s total meat sales, so it’s an important market for the $655 million company. In response to the abattoir restriction AACo redirected cattle to another abattoir approved by Chinese authorities and it also sold its beef elsewhere.
“There’s been pretty significant demand across some of our other markets, most noticeably in the US and Korea, so we’ve redirected into that space. And while China, we hope, comes back on, it’s not a huge issue for us at the moment,” AACo boss Hugh Killen said recently.
Is our dairy industry affected?
Chinese consumers have grown very fond of Australian dairy produce, with China buying about $1.14 billion of our dairy exports last financial year.
Australian dairy exports have a reputation for being high-quality, safe goods. And safety is a crucial consideration for Chinese consumers, especially in light of a food safety scandal that rocked China in 2008, when six babies died and thousands more became ill after having Chinese-made infant formula.
So far, and much to the relief, no doubt, of ASX-listed dairy or infant formula companies such as Bubs Australia and a2 Milk, Australian dairy exports to China have not been hit by any fresh China-imposed trade restrictions.
While the sector is well aware of the stoush, it could also be well-positioned to minimise the impacts of any restrictions.
When asked about the China-Australia trade tensions in August, at the time of its full-year results, a2 Milk chief executive Geoffrey Babidge emphasised a2’s strong Kiwi heritage.
“Let’s remember a few things: we’re a trans-Tasman company, we’re a company that, in fact, was incorporated in New Zealand, and all key decisions are made in New Zealand,” he said.
Babidge added that all of a2’s infant formula sent to China was sourced in New Zealand, which he said enjoyed a unique reputation in the Asia-Pacific as a producer of high quality foods.
“We are as well placed as any company doing business in the Asia-Pac [Pacific] into China.”
Infant formula company Bubs Australia has no Kiwi heritage. But, thanks to an investment decision made just weeks ago, it does have a China tie that is likely to stand it in good stead.
Bubs recently announced it would invest in a new facility in China to make infant formula using goat milk powder from Australia. It hopes that the investment means it can get approval for its own Chinese label products to be sold in Chinese shops. Bubs currently does not have this crucial China regulatory tick, but the factory it is investing in is certified to make infant formula for the huge China market.
“Everyone sees the opportunity in China, but there’s a new level of risk there in terms of the geopolitical landscape, and I think this strategy has really mitigated some of that risk,” Bubs founder Kristy Carr said at the time.
Why is China targeting certain industries?
All of the agricultural sectors hit recently, or at serious at risk of Chinese trade restrictions, share some key characteristics.
All generate substantial revenue from exports to China, either just under $1 billion a year or as much as about $3 billion a year. This means they make a meaningful and extensive contribution to Australian employment and wealth.
Most have rapidly increased their earnings over the past decade, and all could be replaced with goods sourced from other nations – ones that didn’t lead the push for an independent inquiry into the coronavirus. The nature of the agricultural industries – reasonably labour intensive, and featuring many small export players – also means that heavy trade restrictions imposed by China have far-reaching impacts in Australia.
Can Australian exporters of agricultural goods survive without access to China, or with severely reduced access? That remains to be seen but, at the very least, they will need to reshape, reorganise, find new markets, or grow existing ones further.
Source: Thanks smh.com