If you believe the media, China’s attacks on Australian exports are a major crisis threatening to wreak havoc on companies and jobs.
Outlets like the Financial Review are regularly running op-eds urging Australia to cave in to China’s bullying in the name of restoring good trade relations. There was great consternation when shares in Treasury Wine Estates fell 11.25% on Friday before a trading halt, in response to China’s punitive tariffs on Australian wines under the guise of anti-dumping.
But don’t forget: Treasury shares fell in late January, down from $17.30 on January 24 to $12.35 on January 29. This was not caused by Chinese tariffs, but by a profit warning because of weak sales in the US (the earlier than expected retirement of CEO Michael Clarke also added to the selling pressure).
The Chinese anti-dumping claims came in August, which saw Treasury shares plunge from $12.84 to $9.57 — not far from Friday’s $9.25. The $2.54 billion in market value the Chinese tariffs cost Treasury was much less than the cost of a weak result and a surprise departure of the CEO.
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But while Treasury was being hammered, BlueScope Steel — Australia’s worst abuser of anti-dumping laws, particularly against more efficient and cheaper Chinese competitors — has been doing very nicely. Its earnings are soaring, with two upgrades in two months and a share price that has surged from $7.73 in the depths of the March sell-off to $17.30 on Friday.
According to BlueScope “demand strength, particularly in the Australian market, has continued to outpace our expectations. We now expect that Australian construction and manufacturing activity will remain strong, driving elevated domestic steel despatches for the balance of 1H FY2021”.
Part of that domestic success has been from keeping Chinese imports out — thus pushing up prices for the construction industry and consumers.
BlueScope’s star business, though, is its North Star steel plant in Ohio. This is a direct beneficiary from Trump’s 25% penalty tariffs on steel imports — principally from China. BlueScope also has a modest business in metallic coating, painting and steel building product operations in China which “saw a better than expected recovery following the COVID-19 shutdown”.
Since late August, BlueScope’s sharemarket value has risen $2.3 billion, off the back of Australian and US protectionism — protectionism of the good old-fashioned kind that passes the costs on to other business and consumers.
If Australia and BlueScope hadn’t so egregiously abused anti-dumping rules in the first place, maybe the Treasury Wine Estates of our economy would have less to complain about.
As for the bigger picture on trade, our iron ore exports hit a record $10.9 billion in value in October with prices averaging US$100 a tonne for the first time since 2013 — fuelled of course by China. Copper prices have surged 70% since the lows of March and are up 12% in November. Lead, zinc, and nickel also rose last week. Zinc reached a 20-month high.
Rising oil prices are dragging up LNG prices (oil prices are up 27% so far in November). Agricultural commodities are strengthening too — wheat and corn are near four-year highs, while soybeans are rising because China is buying more than the US.
Coal prices remain weak because China is banning Australian shipments, but that is forcing up global prices for coking coal especially, with Chinese steel mills forced to pay higher prices for Canadian and US coal and ship it further (protectionism does that to those stupid enough to use it).
And China’s belligerence towards Australia has been easily absorbed by currency markets this month. The dollar peaked at 74.14 US cents in September and touched 73.99 US cents on Friday. It could easily run back over 74 US cents. AMP chief economist Shane Oliver reckons there’s a chance the dollar could hit 80 US cents in the next year.
That would put further downward pressure on inflation, which is the opposite of what the Reserve Bank (RBA) wants. Rising oil prices will help, but without wage rises, the prospect of any inflation pressure seems more remote than ever.
RBA governor Phil Lowe has said a key reason the bank decided to spend $100 billion buying bonds around the 100-year mark was because quantitative easing programs elsewhere in the world were boosting Australian interest rates.
“[This] added to the attractiveness of Australian dollar assets and this has put some upward pressure on the exchange rate,” he said.
Since then the Aussie dollar has risen more than three US cents.
If Chinese trade sanctions were considered a real threat, then the Aussie dollar would have been sold down heavily in November. Hardheads in the markets know that a lot of it is for show — and that when it comes to protectionism, China is hardly alone.