China drops jackboot on LNG, iron ore trade

Australia’s China divorce hits another milestone today. Following recent Morrison Government warmongering and ripping up VIC’s BRI deal, the blowback has arrived as the next commodity to be targeted is LNG:

  • Two Chinese importers have been told to avoid Aussie LNG.
  • China imported 29mt in  2020. About 10mt of that is above contract obligations.

Recall that other trade bans began this way with small bans that ratcheted up. With Darwin Port, Confucious Institutes and other China deals all set for wind back, expect more LNG to be targeted.

I don’t expect the whole lot to go but the 10mt of spot market purchases are easily canned.

Like all other fungible commodities, the LNG will go elsewhere and it won’t cost Australia much, so it’s a welcome diversification of our trade mix. Hopefully, the blockages are for east coast suppliers, given the gas export cartel only costs Australia money anyway.

Meanwhile, the superheated iron ore bubble was pricked overnight as authorities moved to tighten limits for speculators on the Dalian Commodities exchange:

  • Trading limits and margin rules were scaled up Monday for iron ore.
  • Shanghai steel futures were likewise hit.

These kinds of limits make it more expensive, and higher risk, to trade the derivatives that typically lead spot prices. Iron ore futures dumped 5% overnight after yesterday’s limit-up explosion.

In my experience, these trading limits are a somewhat effective tool at dampening exuberance. Though they will not end any rally by themselves, they are not a bad counter-cyclical indicator given they typically arrive somewhere near the top.

That said, I’m not calling the peak yet. The rally is so overheated that all things are possible in the near term.

Looking beyond your nose, I’m definitely still a seller into this rally as China tightens and catch-up growth begins to slow in the second half.

David Llewellyn-Smith
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Comments

    • Lord DudleyMEMBER

      Interesting article. The end was odd though… it basically concluded that the miners ousted Rudd, they know they’re in control, and the current pollies are all terrified of them. This seems to me to be the end of the story… there will be no resource super profits tax, and anyone who tries will be politically annihilated by the miners and their allies in media. It’s at odds with the title of the piece.

      Australia is exhibit A when it comes to the “resource curse”… all those resources, just sitting there waiting for someone to wrangle the political rights to access them and keep all the profit. No innovation required; the wealth already exists without anyone lifting a finger. The only question is, who gets to control it and keep all the profit?

      Resources are inherently corrupting for these reasons, and the more of them you have, the more corrupting they are. Australia has done poorly with hollowing out its economy, but given the scale of the resource boom, perhaps Australia was doomed to endemic corruption no matter what.

      • all those resources, just sitting there waiting for someone to wrangle the political rights to access them and keep all the profit. No innovation required; the wealth already exists without anyone lifting a finger. The only question is, who gets to control it and keep all the profit?

        My hat is off to you sir for stating this. This is absolutely key.

        A typical Australian, living in Australia (like Ermo) tends to think that resources under Australian soil somehow belong to them and not to people from other lands. This is understandable.

        However a powerful elite globalist has a different perspective. This elite views any politician living under his thumb to be naturally belonging to him. Why shouldn’t this elite demand his servant act to further his interest. The Aussie gas gets drilled and the elite gets the money.

        The only politician standing for the ordinary Ermo voter instead of the global elite is Pauline Hanson. Read what she has to say about Australian natural resources.

        • TheLambKingMEMBER

          The only politician standing for the ordinary Ermo voter instead of the global elite is Pauline Hanson.

          I call bull. She voted for the Adani mine and voted very heavily in favour of coal mining! She is not the Trump lite you are looking for 🙂

      • Resources are inherently corrupting for these reasons, and the more of them you have, the more corrupting they are. Australia has done poorly with hollowing out its economy,

        I agree completely but when I look at Australia’s Industrial policy response (such as this)
        https://www.smh.com.au/politics/federal/industry-unions-warn-of-fresh-wave-of-dumped-foreign-imports-20210510-p57qhe.html
        I find myself just shaking my head and asking myself ffs what is it that they don’t understand.

        “The anti-dumping measures taken so far have actually saved businesses and industries but local manufacturing is particularly susceptible at this time,” Mr O’Connor said. “The trade rights of Australian industry need to be enforced by the federal government and it’s an incredibly complex process which needs to be fully funded and resourced.”

        Mr O’Connor said the current climate represented a distinct risk of accelerating the decline in Australia’s sovereign manufacturing capability. The union is calling for a 35 per cent increase in funding….

        Of course the target of these antidumping measures is China.
        I’m certain there are cases of Chinese product dumping BUT for the most part China is not “dumping” product in Australia because the product they are selling can be easily purchased from several other countries at similar price points. Real Dumping occurs when the product is simply not available anywhere at anything like this price point, generally when you see real dumping happening you also see enterprising locals arbitraging this opportunity. Say the Australian price for a widget is $5 and the global price is $10 what you’ll see happening is that Australia suddenly starts buying more $5 items then it needs and reexporting these items for $10. Makes for an almost zero work nice little earner. For me the existence of this arb trade is the best measure of local market manipulation through dumping.
        OK so why is this important? well simply because Industrial policy needs to be applied sparingly and in a very targetted manner or it simply worsens an already bad situation.
        Australia’s supports for the local car industry is an excellent example of a policy that could have been leveraged to grow our export base but was applied in such a manner that it created a needy government dependent industry whereby there was no guarantee of additional exports for any additional investment. In short the process of industrial support has been corrupted.

  1. China’s goal of being the largest economic power by 2035 may run into demographic headwinds. ANZ’s Raymond Yeung assesses how this handbrake affects its chances of “winning the 21st Century” … Raymond Yeung of ANZ Bank Hong Kong … Interest Co NZ

    https://www.interest.co.nz/news/110341/china’s-goal-being-largest-economic-power-2035-may-run-demographic-headwinds-anzs

    China Is a Paper Dragon … David Frum … The Atlantic

    https://www.theatlantic.com/ideas/archive/2021/05/china-paper-dragon/618778/

    U.S. policy makers should look to the future with a little more confidence and a lot more trust in trade, markets, and the superior potential of a free people. …

    … concluding …

    … This is merely a sample of the gathering troubles facing America’s designated strategic competitor and economic adversary. The United States is hardly trouble-free, but if you had to choose either set of troubles, you’d surely rather face the American list than the Chinese. That’s why Biden said, “C’mon, man,” and why U.S. policy makers should look to the future with a little more confidence and a lot more trust in trade, markets, and the superior potential of a free people under an elected government. … read more via hyperlink above …