China and Australia

It was a tectonic shift in power in the Pacific. Only when these tectonic plates shifted, there was no tidal wave. But make no mistake, America’s effort to contain China is in tatters. That’s the logical conclusion to make in the wake of Prime Minister Wen Jiabao’s visit to Australia last month.

Wen left with a contract to buy 20,000 tons of uranium from the Aussies – that’s enough fuel for dozens of nuclear reactors, or if the Chinese want, thousands of nuclear weapons. The deal is emblematic of the growing relationship between Australia and China. And it comes directly on the heels of a visit to Australia by U.S. Secretary of State Condoleezza Rice, who urged Australia to help in China’s “containment.”

Instead of containing the Chinese, the Australians are doing business with them. Lots and lots of business.

And none of the deals looms larger than the uranium contract. That deal is huge, particularly when compared to the controversial nuclear ambitions of Iran. The Iranians only need a few hundred tons of nuclear fuel for the reactor they want. The Australians are going to sell the Chinese 20,000 tons. Of course, it’s not just about uranium. The Australians are also shipping increasing amounts of LNG and coal to China. The punchline here: China’s power cannot be ignored or resisted, particularly by a resource-rich country like Australia.

China has become Australia’s third-largest trading partner, behind the U.S. and Japan. And as you might expect, energy is the biggest piece of their trade. Energy and mineral products account for about 60 percent of Australia’s exports to China. In March, China got its very first shipment of LNG delivered to CNOOC’s terminal in Guangdong. The source: North West Shelf Australia LNG, a consortium headed by BHP Billiton that includes BP, Chevron, Shell, and Woodside.

Australian natural gas is crucial to China’s future. China needs enormous amounts of gas to reduce its air pollution. By 2010, China hopes to increase natural gas’ share of total energy use from 3 to 6 percent. That’s perfect for Australia, which has a surfeit of stranded gas. The Chinese are bargaining hard for new LNG shipments and so far the Australians have been willing to negotiate.

However, energy is only a part of the equation. China is currently Australia’s largest buyer of iron and nickel ores.

Wen’s visit was one of several made by top Chinese officials to Australia in recent years. His visit follows those of President Hu Jintao in 2003 and Wu Bangguo (chairman of the National People’s Congress) in 2005.

Wen’s statements during his recent visit went beyond the usual platitudes: “There are no issues left over from history and there are no cultural matters standing in the way of our bilateral relations.” Australia’s Prime Minister John Howard countered: “Of all the important relationships that Australia has with other countries, none has been more greatly transformed over the last 10 years than our relationship with China.”

During Wen’s visit, Australia and China signed a landmark nuclear safeguards pact, “cooperation in the peaceful use of nuclear energy” opening the way for exports of Australian uranium to fuel China’s booming nuclear power industry.

Australia, with 40 percent of the world’s uranium deposits and the world’s second largest uranium exporter behind Canada, may ultimately export 20,000 tons of uranium to China during a ten-year period beginning in 2010. Those exports to China will double Australia’s current exports of the fuel.

The Aussie uranium is needed to bolster China’s uranium production, only about 700 tons per year, most of which is used by the Chinese military. Australian uranium will fuel many of the 50 nuclear reactors that China intends to build over the next 20 years.

Before the end of Wen’s visit, two more deals were signed: China National Chemical Corp. (ChemChina) acquired 100 percent of Qenos, a joint venture between ExxonMobil and Orica. Qenos is Australia’s biggest ethylene producer. Another contract between CNOOC and BHP Billiton gave CNOOC four offshore blocks located in the Outer Browse Basin, off Australia’s northwest coast. The blocks are about 300 kilometers offshore and cover a total of 21,000 square kilometers in waters up to 2,000 meters deep.

The huge uranium deal is but one of many blockbuster deals done in recent years:

– In 2004, China and Australia signed a $20-billion LNG deal to export gas from Australia’s northwest shelf project. The deal will supply China’s first LNG plant in Shenzhen with an annual 3 million metric tons for 25 years, the largest export contract in Australia’s history.

– In March 2004, mining giant BHP Billiton outlined an unusual equity deal with four large Chinese steel mills to lock them into a long-term iron ore contract worth $9 billion in sales over 25 years. The contract is for an annual 12 million tons of iron ore.

China’s newly-announced 11th Five-Year Plan contains even more opportunities for Sino-Australian cooperation. Some parts of the plan, like China’s search for diversified global energy supplies, its pursuit of more efficient and effective resource use, with less environmental impact, and its attempt to raise the nation’s scientific and technological levels, are all areas in which Australian businesses can play a big role.

Politically both countries are very active in developing mechanisms for doing business with each other. The Trade and Economic Framework (TEF), signed in October 2003, provides a basis and benchmark for further development of the trade and economic relationship over the next decade. The TEF included a commitment by both governments to undertake a joint Free Trade Agreement (FTA) feasibility study, which was completed in March 2005. Business communities and analysts predict that the FTA will be signed within the next two years.

Australia also benefits from Chinese tourism, with 300,000 tourists visiting the country in 2005. China is also the largest source of foreign students studying in Australia. Victoria University has three campuses in China and is still expanding.

Why is Australia suddenly so attractive to China? Because China is devouring resources of every kind. In terms of consumption, globally it’s first in steel and first in cement, and second in oil only to the United States.

Beyond its relative proximity to China and the fact that it is loaded with resources, Australia is the only developed nation able to deal with China without skeletons in its closet. There has never been any animosity between the two countries, nor any real (or perceived) threat of future conflict.

China's Top Ten Imports

China's Top Ten Exports

While the United States is by far China’s biggest trading partner, and Russia has the energy resources that China needs, both countries come to China with a considerable amount of baggage. The United States, no matter how the relationship may evolve, will constantly harp on China over issues such as human rights, Taiwan, and Tibet. Russia and China will always have a love/hate relationship, with varying degrees of distrust. The two countries need each other yet each remains leery of any involvement.

Australia offers all of the benefits of a highly developed country as well as considerable resources, especially energy, and it does not view China as a potential world threat as do the two superpowers. The occasional rhetoric regarding China that emanates from Washington will never be heard from Australia.

China and Australia, emerging from the Cold War, opened diplomatic relations in 1972, the same year that President Nixon first visited China. The two-way trade, begun after diplomatic ties were launched, remained fairly inactive. It took 24 years to grow from $100 million to $5 billion. However, trade picked up speed in the late 1990s and broke $10 billion in 2002 and $20 billion just two years later. Last year it stood at $27.3 billion.

History of China-Australia Trade

China’s energy alliance with Australia makes perfect sense given the potential problems with its next-door neighbor, Russia. Of course, Russia has all the energy China needs, but the re-centralization of power under President Vladimir Putin does not inspire the Chinese to invest in that country. The Russian government has not been very helpful, constantly sending mixed signals and playing China and Japan against each other, dangling the carrot of oil and natural gas pipelines with routes that change almost monthly.

The rapid development of trade and economic relations will keep its tempo “as long as the two countries continue to create favorable conditions and seek to expand new areas of cooperation,” said Fu Ying, the Chinese ambassador to Australia.

For China there are also the usual Mid-East energy sources, but the Chinese are acutely aware of their risks and their tenuous nature. For now, and perhaps for a long time to come, China definitely wants to avoid conflict with the United States, as well as embroilment in areas where the United States is already involved.

Chinese imports make iron ore one of Australia’s key earners, with exports to China reaching $11.2 billion in 2005 and expected to increase by 26 percent this year.

As usual, such a huge trade relationship does not always travel a smooth road. In a recent report, Goldman Sachs said that price caps are likely on China’s big three suppliers of iron ore – Australia, India, and Brazil (which in 2005 accounted for 86 percent of total Chinese iron ore imports). The reason for the caps? A 72-percent price increase last year. Australia would be “alarmed” if China places restrictions on the price and quantity of iron ore it imports, Australia Resources Minister Ian Macfarlane said.

Rocky road aside, China and Australia are forging ahead in a close cooperation that in many ways will alter the balance of power in Asia. The alliance helps bolster China’s dominance in the region, but accented by the uranium trade deal, will certainly roil the U.S. and the Europeans. But the Chinese can afford to be oblivious to those concerns. They are now a superpower. And the Australians are all too willing to distance themselves from their old allies in order to increase their trade with China. As we said at the outset, it’s all about business.

© 2013 Energy Tribune

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