Agricultural sector bears brunt of China’s targeted attacks but damage will be limited, says Oxford Economics

While exports of Australia’s resources to China look safe for now, despite lingering trade tensions between the two countries, the local agriculture sector is likely to take the biggest hit. But a new report from Oxford Economics offers an upbeat assessment, noting the affected products represent only a minor share of Australia’s agricultural exports and any further deterioration in the Beijing-Canberra relationship would have only a small impact on the overall export outlook. Economic analyst Rory Treadwell and senior economist Sean Langcake said China was Australia's biggest agricultural trading partner, representing between 15 and 20 per cent of food and livestock exports. That share was much higher for certain commodities. Their report said restrictions imposed so far by China — ranging from sanctions on barley and certain abattoirs to stricter inspections on grains and seafood — had been limited to a small share of exports. It noted that no restrictions had been placed on exports critical to China’s vital heavy industrial machine, and had only targeted goods and services where an alternative source could be easily accessed. “As such, going forward it is primary industries, excluding mining, in Australia that face the largest downside risks,” Mr Treadwell said. “Some producers in these markets are facing a very uncertain outlook and will be looking to pivot to different export markets in the near term; implementing this shift is likely to reduce revenues, at least temporarily. “But these products make up a small share of Australian exports, and a further deterioration in conditions would have only a small impact on the overall export outlook.” The outlook for mining exports, which account for the majority of goods exports, remained positive, despite some reports of delays in delivery of thermal coal. “Chinese imports have recovered robustly, with the government’s stimulus of the economy ... following the pandemic driving increases in demand and price,” Mr Treadwell said. Chinese imports of iron ore were 16 per cent higher than a year ago in September, fuelled by infrastructure stimulus measures aimed at dragging China out of the COVID-19 mire. The Oxford report said restrictions on resources would be a large escalation in trade tensions and appeared unlikely at this stage. “Reinforcing the positive outlook for mining exports is the fact that China relies on Australia for these key inputs to steel manufacturing far more than it does for rural goods.” Mr Treadwell said. “Chinese iron ore imports are majority-sourced from Australia (61 per cent in 2019), with the high quality of the product aiding its attractiveness. And Australia has recently become China’s largest source of coking coal, also used in steelmaking.” However, the report said producers of thermal coal — used for electricity generation — may face more disruption because China has other viable export partners, such as Indonesia, Mongolia, and Russia, and domestic production is significant.