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China punishes Australia as proxy for the west

China Coal (ZHart/WikiCommons)
February 27, 2021

This article was originally published by Radio Free Asia and is reprinted with permission.

As China’s ban on coal imports from Australia drags on, questions are rising about whether Beijing’s political punishment of a major trading partner is worth the cost.

China has struggled with power shortages since the start of the winter heating season due to unusually cold weather, which strained coal supplies.

The crunch has been complicated by growing demand from economic recovery and effects of the COVID-19 pandemic, which slowed domestic coal production and transport to power plants.

But the problems have not prevented China’s government from pursuing a political agenda against Australia despite a free trade agreement between the two countries since 2015.

Although it had experienced customs clearance delays at Chinese ports as far back as 2018, Australia remained China’s leading foreign coal supplier until the ban was officially confirmed last year.

In 2019, Australia accounted for some 57 percent of China’s thermal coal imports and 40 percent of coking coal for steelmaking, the South China Morning Post said.

Despite electricity rationing in some areas, the National Development and Reform Commission (NDRC) formalized its coal ban policy at a mid-December meeting with 10 power companies.

At the meeting, the top planning agency authorized the companies “to import coal without clearance restrictions, except for Australia,” according to the Communist Party’s tabloid Global Times.

Since then, Beijing has remained intent on punishing Australia for a long list of differences, ranging from its decision to bar Chinese telecom giants from developing its 5G networks to its support for investigating the origins of COVID-19.

In November, China issued a list of 14 grievances against Australia including investment restrictions and “siding with” the United States, the Daily Mail said.

A costly clash for Australia

The coal clash has been costly for Australia, which previously relied on China for about one-third of its foreign trade.

On Feb. 8, Bloomberg News reported that 61 bulk carriers loaded with Australian coal have been anchored outside Chinese ports waiting to unload with crews stranded for months at a time.

The standoff has also proved costly for China, but accounts differ as to how much.

On Feb. 10, The Wall Street Journal reported that “China’s ban on Australian coal imports is intensifying a crisis in its coal market, which is battling surging prices, supply shortages, conflicting policy goals and a cold winter.”

“China’s coal war with Australia fuels shortage at home,” the Journal’s headline read.

But in an online column, China energy expert Philip Andrews-Speed argued that the exclusion of Australian coal is likely to be only a contributing factor in China’s power problems.

“The issue of the embargo on Australian coal does not merit much attention in Chinese commentaries,” said Andrews- Speed, a senior principal fellow at the National University of Singapore’s Energy Studies Institute.

“This high quality coal accounts for just 3 percent of the coal used by Chinese power plants, though this share is higher in the richer coastal provinces,” he said.

“The underlying problem is the unexpected soaring demand as China’s economy has recovered, along with tighter environmental constraints,” Andrews-Speed said by email.

Whatever the reasons, thermal coal prices have climbed 84 percent since mid-2020, the Journal reported, raising the related but separate issue of affordability.

“The ban on Australian coal imports has exacerbated this problem. Prices would have risen anyway, but not as much,” Andrews-Speed said.

Orders of magnitude

Singling out the Australian coal ban as a factor may come down to orders of magnitude.

China is the world’s largest producer and consumer of coal as well as the leading importer.

While imports of nearly 304 million metric tons rose 1.3 percent last year, according to official figures, domestic production of 3.84 billion tons also increased 0.9 percent.

The proportions of China’s massive production make it a far greater factor in the country’s supplies.

It can be argued that any import curb may be influential in a supply crisis, but China’s power strains seem to stem from transmission problems in a system with surplus generating capacity, making it less responsive to recovery- driven demand.

Reports suggest that China has also been trying to offset the loss of Australian coal by turning to other suppliers including Indonesia, South Africa, and Colombia.

The Global Times has highlighted new shipments of both coal and iron ore from Sierra Leone, calling them “a sign that does not bode well for Australia, as it shows how easily China could replace Australia with alternative import sources.”

But the substitutions have not spared China from repercussions. Higher prices, longer distances, and quality problems have raised costs for power companies and the steel industry.

Impurities in South African coal and the logistics of Colombian supplies are seen as drawbacks for generators.

“That China has embraced thermal coal from both countries in recent months underscores just how unwilling it is to trade with one of its biggest coal suppliers: Australia,” the South China Morning Post said.

Alternate sources more costly

Alternate sources of coking coal are also more costly.

“The mills are therefore paying a lot more for generally lesser quality coal … putting immense pressure on their margins and profitability,” The Sydney Morning Herald said.

China’s choices on the embargo lead to questions that have yet to meet with obvious answers.

Are the costs to the power and steel industries so high that they could outweigh the government’s interest in imposing sanctions on Australia? Or, are the costs still seen as manageable in the two key industries that benefit from government subsidies?

In November, China’s Ministry of Commerce announced steep anti-dumping duties on Australian wine in a move that allowed it to easily offset the loss with imports from elsewhere.

The wine ban added to unofficial curbs on imports of Australian barley, sugar, logs, lobster, copper, and other commodities, the Australian Strategic Policy Institute said.

But one possible answer to the question of affordability is that China’s animus toward Australia has grown so strong that it will disrupt trade and investment ties regardless of cost.

That interpretation may be beyond the scope of economics, but it may have implications for China’s other trading partners that take exception to its policies, its narrative of the pandemic origins, or its human rights practices.

Beijing may be willing to suffer the costs of continuing the embargo on Australian coal if it serves to warn other countries that their trade could be at risk if they differ over China’s political concerns.

Earlier this month, a Bloomberg News report briefly raised hopes for a break in the coal ban after sources said China would allow some of the stranded coal carrying vessels to unload at Chinese ports. But the report suggested that the move was aimed only at relieving some of the foreign crews after months on board.

On Feb. 11, the Morning Post reported there was no indication that any of the Australian cargoes had received customs clearance.

The mixed decisions have given China the chance to show its humanitarian side while maintaining the threat of its trade sanctions at the same time.

As it stands, China appears prepared to continue its ban on Australian coal indefinitely, letting it serve as an affordable proxy for its political disputes with the West.