Fitch Ratings-London/Sydney/Hong Kong-26 May 2020: China’s decision to impose tariffs on imports of Australian barley and to suspend some Australian beef imports highlights the risks that a deterioration in China-Australian relations could pose to Australian companies that export to China, although the risks vary between sectors, says Fitch Ratings.
China is Australia’s largest market, accounting for AUD153.2 billion, or 32.6%, of its total goods and services exports in the financial year ended June 2019 (FY19), according to Australia’s Department of Foreign Affairs and Trade.
Fitch believes Australia’s agriculture, tourism and education sectors are among those most exposed to a potential escalation in bilateral trade tensions. The Chinese authorities have demonstrated a capacity and willingness to exert influence over spending in these industries in connection with political disputes involving other countries.
China is Australia’s largest market for tourism, education and agriculture exports, and also plays an outsized role in driving their growth. Chinese visitors, including vacationers and students, spent AUD12.4 billion in 2019, while agricultural exports to China in FY19 amounted to AUD14 billion.
We believe risks from China-Australia trade frictions are limited for most companies within these sectors in Fitch’s rated portfolio. However, we have included some benefits from expansion into China into our rating case for Amphora (B/Negative), owner of wine company Accolade. An extension of trade friction to the wine sector could slow the company’s ability to reduce leverage to within our guidelines.
Iron-ore exports to China in FY19 amounted to AUD63.1 billion, natural gas AUD16.6 billion and coal AUD14.1 billion, making these Australia’s three biggest categories for merchandise exports to China.
Australian exports of iron ore and liquid natural gas (LNG) are less exposed to bilateral trade friction. The majority of LNG in the Asia-Pacific is sold on long-term oil-linked contracts, which should offer a degree of protection to Australian producers such as Woodside Petroleum (BBB+/Stable) and Origin Energy’s (BBB/Stable) 37.5%-owned Australia Pacific LNG. We believe the possibility of China reducing iron-ore imports from Australian producers such as Rio Tinto (A/Stable), BHP (A/Stable) or Fortescue Metals Group is low in the near term due to China’s dependence on imports of the ore and Australia’s dominant position in the market.
Australia’s coal producers, including BHP and Anglo American (BBB/Stable), could be more vulnerable to action. Both BHP and Anglo American predominantly export coking coal, but BHP still has a significant exposure to thermal coal. There are some reports that Chinese utilities and steel producers have been informally warned by officials that restrictions on Australian coal imports could increase in the coming weeks.
Thermal-coal producers would be more at risk if China does take action. Thermal-coal exports to China dropped in early 2019 amid media reports that China had imposed unofficial restrictions in association with a dispute over Australia’s treatment of Huawei. Efforts to trim imports could also support prices for domestic producers, making them politically attractive. China’s Qinhuangdao 5,500kcal benchmark coal price dropped to CNY465/tonne in late April, falling below the official “green zone” of CNY500-570/tonne for the first time in four years, which may increase the risk of restrictions being imposed.
The likelihood of restrictions on coking coal is smaller. Canadian and US producers are the main rivals for Australian coking coal, but China’s bilateral relations with both are strained at the moment. Switching to alternative supply sources, including domestic ones, would impose higher costs on coking-coal consumers. Nevertheless, officials may view this as a cost worth bearing, and higher imports from the US could be regarded as helping China meet commitments under its Phase One trade deal with the US that was signed last year.