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.
