Dec 07 2020
As relations between China and Australia hit their lowest point in over half a century, Australian industries are bracing for further tariffs that have already disrupted the Wine Production, Seafood Processing, Coal Mining, Copper Mining, and Meat Processing industries.
‘Agricultural industries, particularly producers of honey, fruit, and dairy products, should be on high alert for tariff disruptions in the near future. There is also an outside chance of tariff disruption on Australian pharmaceutical exports and mining commodities’, said IBISWorld Senior Industry Analyst Liam Harrison.
China has significant leverage over Australia in many industries, as it accounts for 28.8% of Australia’s two-way trade in goods and services. China was Australia largest export destination in 2019-20, accounting for 35.3% of Australia’s merchandise and service exports.
‘Australian industries have invested heavily in expanding their trade with China since the China-Australia Free Trade Agreement was signed in December 2015. The tariffs and trade restrictions introduced over the past year have pulled out the rug from beneath many Australian businesses, dissuading businesses from pursuing trade with China’, said Mr Harrison.
According to the Australian National University, Chinese investment in Australia has plummeted from a peak of $15.8 billion in 2016, to only $2.5 billion in 2019. A further decline is expected in 2020.
Australian honey is a popular commodity in the Chinese market, particularly premium manuka honey, which is known for its antibacterial properties. Honey consumption in China exceeds 300,000 tonnes per year. While China accounts for over a quarter of Australian honey exports, China could easily block honey imports due to readily available alternative suppliers.
‘Manuka honey is harvested from a type of tea tree only found in New Zealand and South-East Australia. The Beekeeping industry in New Zealand would stand to benefit from reduced competition if China imposes tariffs on Australian honey. For Chinese consumers, plentiful supply of cheaper honey would likely replace the lower availability of manuka products’, said Mr Harrison.
Australian honey exports have grown at an annualised 4.1% over the past five years, driven by the China-Australia Free Trade Agreement, which lowered trade barriers for honey exporters.
The dairy industry, in particular the Milk and Cream Processing industry and the Milk Powder Manufacturing industry, are highly vulnerable to shifts in Chinese tariff policy. Dairy exports have become increasingly popular in China over the past five years, with milk powder being a particularly strong beneficiary of growing demand from China. Chinese consumers have demanded Australian milk powder for over a decade, particularly baby formula products, which are perceived to be healthy. Australian milk powder exports to China have surged amid the COVID-19 pandemic, reaching 19,726 tonnes over the nine months through September 2020.
‘Tariffs on Australian dairy products would represent a fairly significant escalation in trade hostilities. Australian dairy products are highly popular, and there are few substitute markets for baby formula that Chinese parents are willing to trust. Action against this market would likely cause significant backlash from Chinese consumers, and could result in weakened support for continuing trade restrictions against Australia’, said Mr Harrison.
China has also become an increasingly important market for some fruit industries, with the Citrus Fruit, Nut and Other Fruit Growing industry sending over 45% of its total exports to China. Apple, Pear and Stone Fruit Growers also send a significant amount of produce to China, with over 30% of industry exports destined for Chinese markets.
‘Losing China as an export market could be devastating to an already weakened industry. Fruit farmers across Australia have already suffered major setbacks, including sweltering heats early in the year, severe bushfires and now a shortage of fruit-pickers due to COVID-19 travel restrictions. Discussions for fruit juice to be lowered in health rating, which have now been pushed off until February next year, also weigh heavily on the industry’s future,’ said Mr Harrison.
Australia’s Pharmaceutical Product Manufacturing industry has become more reliant on China as an export market. Prescription and non-prescription medicine, and supplement products such as vitamin and mineral supplements, are highly popular items in Chinese markets. However, many of these items have alternative markets, and could come under serious threat of restrictions or sanctions from China. Australian pharmaceutical manufacturing revenue is expected to rise by 5.8% in 2020-21, to $12.8 billion. Close to 54.4% of this revenue is expected to be derived from export markets, including China.
‘Although Australian pharmaceuticals are highly popular in China, our largest advantage in providing to this market is our relative geographic proximity. Many industry products have a range of alternative suppliers, such as the US, Canada and various markets across Europe, leaving the Australian industry particularly vulnerable to trade restrictions,’ said Mr Harrison.
In 2018-19, exports of vitamins and supplements to China increased three-fold to exceed $680.0 million, with Australian supplements accounting for over one-fifth of Chinese imports, as Chinese consumers favoured Australian vitamin brands due to their reputation for safety. China is expected to account for 62.2% of export revenue in the Vitamin and Supplement Manufacturing industry in 2020-21.
Australia’s mining sector has become highly reliant on China as the largest market for Australian resources, particularly in areas such as Bauxite Mining and Iron Ore Mining. However, mining commodity exports are anticipated to be relatively safe from any potential Chinese trade restrictions despite the high reliance on China as a market for Australian resources, as these are highly valued commodities with few alternative markets.
‘Australian iron ore is very high quality, and there are currently few markets which can produce the quality, and particularly the quantity, of resources needed to fuel China’s steel manufacturing industry. A recent downgrade in production by Brazilian producer Vale has also weakened China’s potential for alternative markets for iron ore,’ said Mr Harrison.
Pre-emptive actions against tariff threats
While Australian industries are on high alert for additional tariffs from China, many businesses are unable to diversify their markets in the short term.
‘As the COVID-19 pandemic has limited economic activity across the globe, it is unlikely that any new markets will emerge to allow industries to reduce their exposure to China as a key export market, leaving them highly exposed to any potential tariffs,’ said Mr Harrison.
Consequently, the future potential of these industries is currently at the mercy of deteriorating diplomatic relations between Australia and China. External support, such as government subsidy programs or coordinated efforts from the international community are the most likely support avenues which will aid affected industries in the event of imposed trade restrictions.
IBISWorld reports used to develop this release:
- Wine Production in Australia
- Seafood Processing in Australia
- Coal Mining in Australia
- Copper Mining in Australia
- Meat Processing in Australia
- Beekeeping in New Zealand
- Apple, Pear and Stone Fruit Growing in Australia
- Citrus Fruit, Nut and Other Fruit Growing in Australia
- Milk Powder Manufacturing in Australia
- Milk and Cream Processing in Australia
- Iron Ore Mining in Australia
- Pharmaceutical Product Manufacturing in Australia
For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3647