The future for China-Aus trade

China’s structural transformation has begun.

The new Chinese economy will be less reliant on high-emission minerals than it has been in the past as it moves its focus from property development towards digitisation. Electric vehicles (EV), lithium batteries and photovoltaic products – will likely account for 3.8 per cent of its gross domestic product (GDP) in 2024.

Sustained demand for critical industrial metals will continue, but the shape of its demand will change. In this new world, trade flows between China and Australia will reflect the resource requirements needed to underpin this structural shift.

A new economy

China is often referred to as the ‘world’s factory’ thanks to its abundant labour, regulatory environment and large-scale industrial sector. While the economy’s growth rate slowed after the pandemic, new drivers such as the transition to net-zero carbon and upgrading of industrial processes have emerged to shape China’s growth path.

China has an ambitious plan to reduce carbon dioxide emissions by 18 per cent per GDP unit between 2021 and 2025, reaching peak carbon emissions by 2030 and achieving carbon neutrality by 2060. Despite questions around feasibility, China has made progress by diversifying its energy mix.

The contribution of solar and wind energy to China’s total mix increased 8.4 per cent in 2019 to 15.6 per cent in 2023, and carbon intensity has reduced by 4.6 per cent in the period between 2020 and 2023.

The digital economy gives China new impetus to sustain its growth. Recent initiatives, such as Eastern Data Western Computing and Digital Silk Road, showcase China’s accelerating pace of improvement in its digital infrastructure.

China’s ‘new quality productive force’ mantra shows how determined policymakers are to push the shift to green and digital.

Reliant

The economic relationship between China and Australia is still heavily reliant on traditional minerals, with iron ore, liquid natural gas and coal representing 80 per cent of Australia’s exports to China. China’s decarbonisation and digitalisation form a double-edged sword for this trade.

Iron ore is at the centre of China’s trade relationship with Australia, but it is also the most vulnerable to China’s economic transition. So far, China’s steel demand illustrates the economy’s weak momentum, with an estimated drop of 1.7 per cent so far in 2024 following a 3.3 per cent decline across 2023.

Looking ahead, the green transition, plus China’s protracted property sector woes and shrinking population will lead to even weaker steel consumption, weighing on iron ore demand.

The Reserve Bank of Australia expects China’s demand for Australian iron ore to fall by 80 per cent by 2050. The outlook for coal will also change as China adjusts its energy mix.

The amount of Australian coal imported by China has risen since 2023 after China lifted a ban, but imports remain below pre-ban levels. The share of coal used for power generation in China is forecast to fall to 14 per cent in 2050 from 63 per cent in 2022, according to BP.

China’s transition represents a structural change to its resource requirements. Industrial metals, such as copper, aluminium, nickel and zinc, are in high demand due to their importance in clean energy technology, battery technology and hardware for information and communication technology.

As just one example, compared to a ‘conventional’ car, each electric vehicle requires an additional 39.9 kilograms of nickel, 30.9 kilograms of copper, 13.3 kilograms of manganese, 13.3 kilograms of cobalt and 8.9 kilograms of lithium.

Complementary

China and Australia complement each other in green energy development through their strengths in raw materials, processing capability, technology and market demand.

China and Australia are both major players in the EV value chain. Australia dominates upstream supply (producing 43 per cent of global lithium) and China leads in downstream processing and production (80 per cent of lithium-ion batteries and 60 per cent of EVs).

In relation to this EV supply chain, Australian exports of lithium concentrate to China accounted for 67 per cent of total imports in June 2024, rising from 55 per cent in 2023. The absence of local car production in Australia makes it a target market for China’s EV exports, which rose by 7 per cent, year on year, in fiscal 2023-24.

China is also a global leader in solar panel manufacturing and Australia has the highest solar radiation per square metre.

With installation of solar panels in both countries maturing, future development will likely shift to solar panel recycling and long-distance solar energy transmission. Solar panels generally have a lifespan of 20 to 30 years. It is anticipated solar panel waste will reach a crisis level by 2030.

China and Australia also share a ‘distance’ challenge of having solar energy resources concentrated in their western regions while electricity demand is in their populous east.

China has integrated solar energy transfer into its west-to-east electricity project, however significant amounts of energy are still wasted due to limited storage capacity. Both countries are waiting on solar energy storage and transfer projects to alleviate these issues

Vicky Xiao Zhou is an Economist and Raymond Yeung is Chief Economist, Greater China at ANZ

This story is an edited version of the ANZ Research report “China-Australia resources trade: transitioning”, published July 31, 2024