What makes most sense is that China’s gentle brake on Australian coal imports kills two birds with one stone. And as such it delivers an exaggerated impact.
The coal producers are nervous and their share prices have been hit, the Australian dollar is rolling around punch drunk, and Canberra is nervously struggling to assure the community that the Chinese/Australian relationship is tight.
But Canberra can’t explain why ships are floating outside certain Chinese ports still laden with Australian coal — other than to say these things have happened before and everything ultimately returns to normal.
Meanwhile, China’s demonstration of muscle flex places pressure on the Australian government — giving it a taste of what could happen if China did something more meaningful to damage our trade relationship.
Still, the far more likely main reason for importing less coal from Australia is China’s attempt to prop up the price of its own coal.
That will have a direct impact on the Chinese employment market and its economy — which by anyone’s measure is slowing.
Commercial trumps political. This point was made by BHP chief executive Andrew Mackenzie earlier this week.
«There are a number of things happening in China relating to how they plan and moderate, if you like, imports versus their own domestic production,» Mr Mackenzie said.
«I don’t believe for one moment this is linked to some of the higher level issues of relationships between China and the rest of the world, and including with us.»
Reserve Bank of Australia Governor Philip Lowe echoed the Mackenzie line on Friday when he was grilled at a session of the House of Representatives Standing Committee on Economics.
He suggested the fact that Chinese coal industry profitability was suffering provided the motive, and China could also have some environmental reasons for the move.
Dr Lowe’s general response was don’t panic, but wait to see how the situation pans out. He pointed out that the affected coal amounted to the equivalent of two months of exports — not enough to have a significant impact on the Australian economy and not sufficiently large to justify the 1 per cent fall of the Australian dollar on Thursday night.
Unlike Mackenzie, Dr Lowe did not dismiss the political agenda, but he appeared not to rate it highly.
But he did add a warning that there would be «very difficult» economic consequences if the coal restrictions were a sign of a broader «souring» of the Australia-China relationship.
While the Australian currency recovered from its fall within 24 hours, some nervousness remains in foreign exchange markets. Second-guessing the Chinese government’s motives is fraught with hazards.
Why Australia has been singled out by China is another issue for debate.
According to commodities experts Wood Mackenzie, «Australia would account for most of the volume reduction (into China) as it represented over 75 per cent of China’s seaborne metallurgical imports in 2018. Australia exported around 36 megatonnes metallurgical to China last year, (representing) 20 per cent of Australia’s total exports.’
Even so, sentiment from the Chinese media suggests its government remains angry about the shunning of Huawei and the state of diplomatic relations.
The media cited an editorial in the China Daily which said Prime Minister Scott Morrison was «irresponsible» when he alluded to Beijing being behind the cyber attack on the Australian parliament.
Mr Morrison on Monday attributed an attack on the Liberal, National and Labor parties’ networks to a foreign government but didn’t name China.
But Wood Mackenzie highlights the hazards for China in taking longer term or more far-reaching moves to restrict Australian coal.
Finding sufficient high quality coal inside China would be difficult.
For Australian coal exporters, other markets would eventually be found but the general consensus among analysts is that the prices would fall.
‘We expect freight on board Australian prices, particularly for premium and second tier hard coking coals, would come under severe pressure as Australian exporters look to sell excess coal into other markets,’ Wood Mackenzie said.
The bottom line from Wood Mackenzie is that there would be sufficient downside to both countries that the ban won’t be a long term one.
Australia’s economic prosperity is riding on it.
Elizabeth Knight comments on companies, markets and the economy.