Agreement to ensure supply of raw materials, duties to be phased out
The landmark signing of a free trade agreement between China and Australia on Wednesday willfurther ensure the supply of commodities to the world's second-largest economy, helpingChinese users cut costs for materials such as coal and iron ore, industry experts said.
After more than a decade of negotiations, the two sides signed the China-Australia Free TradeAgreement, giving Chinese steel companies and power stations more choices when they needto import iron ore and thermal coal.
But the pact "will bring tougher competition to Chinese miners, which are already suffering from aweak market and falling prices", said Zhang Lin, a senior researcher at the Lange SteelInformation Research Center.
Australia is the biggest iron ore supplier to China, providing about two-thirds of total demand.
According to data from the National Bureau of Statistics, China imported 71 million metric tons ofironore in May, a 12 percent decline from the previous month and 9 percent lower than themonthly average in 2014.
"China's economic slowdown has caused lower steel demand, which resulted in declining ironore imports," Zhang said. "It will cause worries among Australian miners because the miningindustry contributes about half of the country's economic growth."
The agreement will help Australian iron ore miners sell their output on preferential terms to buyersin China, which will be beneficial to the Australian economy.
Australian coal producers will also benefit. Under the agreement, tariffs on coking coal exportedfrom Australia to China will end, falling from 3 percent to zero immediately. The tariff on thermalcoal is being phased out over two years, and there will be tariff eliminations on a wide range ofAustralian manufactured goods, including pharmaceutical products and vehicle engines.
For the first four months of the year, Australian coal accounted for 43.6 percent of China's totalcoal imports.
Compared with Indonesian coal, Australian coal is of higher quality with less sulfur, which is inline with the Chinese government's policy on environmental protection.
"Most of China's coal producers are facing sharply falling prices and weak demand, which hascaused many to lose a lot of money in recent years," said Liu Dongna, a coal analyst withShandong-based commodities consultancy Sublime China Information Group Co Ltd.
"The increasing Australian thermal coal imports will worsen domestic coal companies' profitsbecause Australian coal has better price competitiveness compared with domestic sources,"she said.
Although some Chinese companies will face tougher competition from Australia, the agreementalso offers opportunities to other industries such as steel and manufacturing, said Wei Zengmin,an analyst from steel information provider mysteel.com.
He said Australia's infrastructure construction projects will generate demand for steel productsand steel structure, which Chinese companies can provide.
"However, Chinese steel exports often face anti-dumping investigations in foreign markets, andAustralia is not an exception. Thus, Chinese steel companies should be aware of potential tradedisputes in their overseas market expansion in Australia," Wei said.