Not all kids get along in the playground. Especially when there are shiny toys up for grabs and someone doesn’t know how to share.
But it doesn’t mean kids can’t learn from their mistakes.
If you’ve ever had kids, you know the score. One minute, someone’s crying over a toy train. The next, all you can hear is laughter and cooperation.
It’s not too dissimilar in politics.
So, when an apparent disagreement happens between trading nations, the market can freak out for no good reason.
I’m guessing this is what may have happened over China ‘banning’ Aussie coal imports last week.
But let’s have a look at the situation in more detail…
It’s no secret that amidst the US-China conflict, Australia’s been caught at times in an awkward position.
Which side do we take? And how do we balance these relations in a way that doesn’t compromise our economic and political stability?
Well I say we leave the answers to those questions to the pollies.
But as an investor, you can’t overlook the latest trading blow from China and the questions it begs…
What’s really going on?
In case you’re not up to the date with the story, I’ll briefly recap what happened:
Aussie coal producers suffered a savage setback last week after Chinese authorities seemed to place an indefinite ban on imports.
This is ahead of a strict new regime of quotas.
The reason? Well, nobody completely knows.
Regardless, the market panicked and the Aussie dollar tumbled like Jack and Jill.
It’s understandable, of course. Coal is Australia’s most valuable export worth a whopping $64 billion worth of income. And China buys a quarter of it.
Many think China’s just sent us a worrying message. Analysts say the move ‘crystallises fears’ about a possible crackdown.
But when you dig a bit deeper some fears may have been exaggerated. For instance, currently the ban is only on coking coal used for steel making.
A commodities analyst from CBA believes this ban only affects a small percentage of Aussie producers.
Though the situation appears political, we don’t know fully why this is happening. Until then, it may be wise to keep a grip on our emotions.
Trade Minister Simon Birmingham is in conversations with China to seek clarification, but remains confident in the interim. Birmingham said in a statement:
‘China is a valued partner of Australia and we trust that our free trade agreement commitments to each other will continue to be honoured.
‘Australia is, and will continue to be, a reliable supplier of resources around the world. Australia’s exports of coal to China in the fourth quarter of 2018 were higher in volume and value than the same period in 2017.’
It’s important to note that we went through a very similar situation last year. But after all was resolved, both the value and volume of our coal exports had significantly increased.
Remember the kids playing with toys analogy I suggested? Like I said, it’s not out of the ordinary for trading parties to kiss and make up.
And the media certainly like to up the ante, wherever they possibly can.
Unfortunately for some investors, they buy into the negative hype.
BHP chief executive Andrew Mackenzie has also weighed in on the matter, saying that all suppliers had been hit by delays at Chinese ports. He rejects the reason being political. Mr Mackenzie stated:
‘There are a number of things happening in China relating to, how they plan, and moderate, if you like, imports versus their own domestic production.
‘I don’t believe for one moment this is linked to some of the higher level issues of relationships between China and the rest of the world, and including with us.’
How the China-Aussie produce trend will be affected…
A ban or delay on imports is never a good thing. But it doesn’t necessarily spell chaos.
The fact is China needs what we dig out the ground. We’re a reliable, competitive partner.
And not just in resources, but in food too. In my opinion our ties to China are only going to deepen here.
With a billion hungry people to feed, China can no sooner afford to ban our coal as they can ban our food.
China’s long had a love affair with our infant formula, our fresh, clean produce and food products, and our burgeoning natural beauty industry.
Brunswick’s iconic Brownes Dairy has just churned out 800 tonnes of cheese into the Chinese market. That’s a lot of cheese!
And let’s not forget that only last month, the Chinese-Australia Free Trade Agreement (ChAFTA) removed tariffs for a number of Australian food producers.
The media’s always going to put a wedge in between Australia and China — at least, for as long as the situation with the US remains tense — but we don’t need to treat these stories like gospel.
The fact remains that a growing middle class in China are hungry for our products, and great economic gains lie ahead for those who can keep their head straight.
And the coal situation? We’ll soon hear laughter and cooperation again from the playground, I’m sure of it…
Contributing Editor, Money Morning
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