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China may punish Australia with trade restrictions, but it will remain a key iron ore supplier

12 Jun 2020 06:01 PM

Relations between China and Australia have been declining in recent months, driven by the Australian side's call for an international investigation into the origins of the Coronavirus, which was first reported in the Chinese city of Wuhan.

In what is seen as revenge for Australia's stance, Beijing has suspended some beef imports, imposed large tariffs on barley, and it is reportedly considering further action on products from wine to fruit.

The Australian Prime Minister said on Thursday that he would not be intimidated by coercion. "We are an open trading country, but I will never compromise our values in response to coercion from anywhere", Scott Morrison told local media on Thursday.

China has not yet targeted its largest commodity import from Australia, iron ore, because the Asian giant has few other options. Two other major commodities - coal and LNG - have also been mostly spared so far.

In fact, Australia's exports of energy and natural resources to China are booming, with mining one of the largest contributors to the Australian economy. Australia's exports of iron ore and liquefied natural gas to China have increased by 8% and 9% annually, compared to last year. China's imports of Australian coal are far ahead of where they were pre-epidemic.

The Chinese government media criticized Australia for calling for an investigation and warned that China might impose restrictions that would seriously harm the Australian economy. Last month, statements made by an official with the China Iron Association said that Australian iron could be replaced by African iron ore, but that there would be a delay of 4 to 5 years, and that once the transition, the status of Australian crude would be lost.

China is the world's largest iron ore consumer and relies heavily on Australian iron ore. On the other hand, Australia is the world's largest iron ore producer and exporter, accounting for about 60% of the world's total seaborne shipments in 2019, according to the World Steel Association.

Brazil was the second largest exporter, and accounted for 23% of global seaborne iron ore in the past year, and the country’s production has been affected by the epidemic, wet weather and repercussions of a recent major mining disaster, and there are expectations for a 4% decrease in exports of Brazilian iron ore in 2020, after a drop of 13% in 2019. This leaves China importing more than 60% of its iron ore from Australia, with few alternatives.

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