China and Australia: Commodity Markets and Environmental

Problems

Introduction

In the last twenty years, the relationship between Australia and China has grown significantly. Both

countries are important member of APEC (Asian-Pacific Economic Cooperation), of the East Asia

Summit, and of the G 20.

The relationship between the great Asian and the continent “Down Under” have changed radically

since the 90s, when the economic takeoff of China required the geographical diversification of

commodities, of which Australia is very rich.

Today, the financial transaction and the trade flows

increased tenfold. China is Australia's largest two-

way trading partner in goods and services (valued at

more than $150 billion in 2013), the largest goods

export destination ($95 billion in 2013), and the

largest source of goods imports ($47 billion in

2013). China is Australia’s largest services export market ($7 billion in 2013). In 2005, Australia

and China signed a bilateral Free Trade Agreement (ChAFTA). Since than 21 negotiating round

have been completed and after almost ten years the deal was completed and the details released on

November 2014. The stock of Chinese investment in Australia is now more than fourteen times the

level it was in 2005 at $31.9 billion, with net new investments of $8.8 billion in 2013.

From the point of view of the environment,

although China is a giant developing country

and Australia a stable part of the first world,

both are under the influence of many serious

environmental problems. Given the vastness of

its territory, for the large population and its

enormous economic, China's impact on the

environment and the economy is not only

important for the Chinese but for the whole world. On the other hand, Australia is located in one of

the most delicate of the globe and is the first society in the First World facing grave environmental

problems that could make it collapse. consequently Australians are taking into consideration the

work of a radical restructuring of their society that could counter the economic growth based on

exports of raw materials.

Chinese impact on commodities market

As of 2013, China's market economy is the world's second largest economy by nominal GDP in,

totaling approximately US$9.469 trillion according to the International Monetary. If purchasing

power parity (PPP) is taken into account, China's economy is the world's largest economy.

Moreover, it is the world's fastest-growing major economy, with growth rates averaging 10% over

the past 30 years, and also a major participant in world commodity markets. The commodity

markets in China are still in a development stage, with only a few exchanges in China trading in a

small group of commodities but it has displayed an intensive use of commodities compared to the

other emerging countries. China’s consumption as a percentage of global production accounts for

about 40% of base metals, 23% of major agricultural products and 20% of non-renewable energy

resources.

Metal Commodities

Over the past two decades, the construction of

urban housing and the provision of

infrastructure such as roads, railways, sewerage

systems and electricity generation and

distribution systems have created sharply

higher demand for metals such as copper,

aluminum and steel. Since China’s accession to

the WTO in 2011 and subsequent

manufacturing boom, long-term investments in urbanization and infrastructure have contributed to

growing Chinese metals demand.

This sustained rapid industrialization has driven unprecedented demand for natural resources, in

particular minerals and metals. By the end of 2010 China accounted for approximately 2/3 of world

iron ore demand, 1/3 of aluminum ore demand and more than 45% of global demand for coal.

The share of investment in GDP has increased from 35% in 1980 to 49& in 2010. As a share of

fixed asset investment, infrastructure accounted for 27% and manufacturing for 31%. Residential

investment has also become an important source of commodity demand, with its share of GDP

having increased from 5½ per cent in 2004 to around 9 per cent in 2011.

Manufacturing sector accounts for 40 per cent of Chinese GDP, with at least a quarter of steel

consumption directly used in industries such as machinery, automobile and home appliances. These

sectors are also a key driver of aluminum demand. China’s share of global iron ore consumption has

more than doubled since the beginning of the 2000s to reach 52% in 2010. Chinese import growth

of iron ore is closely linked to demand from the real estate and infrastructure sectors. Today,

investment in infrastructure is going hand-in-hand with a gradually slowing of the demand growth

of iron ore. Despite being the world’s fourth largest iron ore producer, China dominates global iron

ore markets and accounted for around 70 per cent of global imports in 2009. Around 40 per cent of

its iron ore imports are sourced from Australia.

The structure of Chinese economic growth has been mainly metal intensive, so metal intensity has

tended to increase in line with economic growth. However, per capita metals consumption and

metals intensity of GDP, like per capita income, remain well below the levels of advanced

economies. Chinese demand for the metal will grow again, while investment rates are estimated to

decline over time so China’s metals intensity and per capita metals consumption is expected to

stabilize and decline, as did the metal intensities of other Asian economies, such as Japan and South

Korea, that followed a manufacturing and export-intensive development path.

Agriculture commodities

China has less than 9% of the world’s arable land and about 6% of the world’s water supply but has

more than 20% of the world’s population. China is the world’s largest producer of rice and wheat,

and the second largest producer of corn, but also the largest consumer of soybeans, wheat and rice,

and the second largest consumer of corn.

In summary, it is the world's largest producer

and consumer of agricultural products and also

the world’s largest consumer of fertilizer.

Nevertheless, with rising agricultural demand

and slowing agricultural productivity growth,

China’s emergence is having an progressively

important impact on global agricultural

markets. In the last five years, Chinese

agricultural exports have grown 23 per cent

annually.

China has been a significant driver of increased

global demand for soybeans and meat while China’s share of global wheat and rice consumption

has declined in recent years.

Agriculture commodities are important not only for human consumption. But also as feed for

livestock and as an input into energy production. Feedstock demand accounts for 70% of Chinese

corn consumption, 14%of soybeans and 12% of wheat. The total production of meat has grown

from 45 million to 74 million tons, generating a rapid growth in demand for fodder.

Today, the country accounts more than 70% of soybeans global imports and could also become the

top corner importer due to the strong demand for livestock feed.

Energy commodities

A consequence of the rapid economic growth of China has been its rising demand for energy, which

has had an important impact on global markets for energy commodities. In twenty years, China’s

share of global primary energy consumption has risen from 8% to 20%. Oil and coal demand has

increased quickly, but since 2000 the increase was even greater, reflecting the China rapid GDP

growth and the shift in its economy.

The China energy consumption is obtained mainly from coal, indeed the share of global coal

consumption has risen to almost 50% in 2010, up from 29% in 2000. Today, the consumption of

coal accounts for 70% of its total energy needs, compared to 30% globally. Moreover, it should not

be forgotten that China is also the world’s largest consumer and producer of coal with 13% of the

world’s proven coal. reserves.

The consumption of oil, in line with the strong

energy-intensive economic growth, increasing at an

annual rate of 6.8% in the last ten years. The demand

for petrochemical feedstock and construction-related

petroleum products and the increased demand for

transportation fuel has led to increased oil

consumption. Although China is a important producer of oil, the increasing demand has

transformed the country from a net oil importer to a net oil importer. According to a report by the

Energy Information Administration (EIA), in September 2013, net imports of oil and other liquid

fuels on a monthly basis in China exceed those of the US, making it the largest net importer of

crude oil and other liquids throughout the world. The net increase in imports of oil and other liquids

in China is driven by stable economic growth, with the rapid growth of Chinese oil demand

outpacing the growth of production.

Since 2007, China is a net importer of natural gas. In 2011, the country consumed 131 billion cubic

meters of natural gas compared to a domestic production of only 103 billion. Moreover, the imports

were 28 billion cubic meters, of which 17 in liquefied natural gas (LNG), equivalent to an annual

increase of 33%, constituting 21% of the total consumption of natural gas.

The Chinese natural gas consumption has risen, the annual consumption growth has averaged 15%

over the past year, but the share of natural gas remains at only 3% of China’s energy mix.

Natural gas is largely used as a feed stock in chemical fertilizers, but will play an increasing role in

electric power generation and residential energy use.

Despite the large reserve of natural gas in the remote north and western regions, China’s

dependence on natural gas import is expected to increase further in the medium term. The

agreement with Russia is a proof. For now, the main exporting country is Australia (30%) followed

by Qatar (19%), Indonesia (17%) and Malaysia (13%).

China’s government has in place a policy objective to increase the energy share of natural gas to 8%

by 2015 in order to improve energy efficiency and energy diversification an bring the use of natural

gas energy portfolio national average of 10% in 2020. Based on this goal, it can be estimated that

the demand for natural gas will increase from 131 billion cubic meters today to 300 billion in 2020,

for an annual increase of 8%.

China’s impact on Australia commodity market

Australia is one of the largest capitalist economies in the world, with a GDP of US$1.525 trillion as

of 2014. It is the 12th largest national economy by nominal GDP and Australia’s HDI (0.938)

positioning the country at 2 out of 187 countries..

Australia has managed to make the most of its subsoil rich in natural resources and its ideal

geographical location to satisfy the hunger for commodities of the Asian giant. It is the country that

has most certainly ridden the wave of the boom in consumption of commodities by China and the

consequent rise in prices of raw materials. The

Australian nominal GDP rose from $424 billion in

2001 to $1.542 billion in 2012. This resulted in an

annual nominal increase of 13% while in real terms

the GDP grew at an average of 3% per year. Even

during the financial crisis of 2009, the country has

registered a growth of 1.5%, a real record, second only

to China.

Despite the boom in exports of raw materials, Australia does not have particularly developed

manufacturing industry and must therefore import many more goods than it exports.

Analyzing what are the commodities available to the Australia and how many exports in terms of

tons and in monetary terms, it can be seen the lion's share is held by the two materials more

required by China to produce steel: the ore iron and coke. China produces nearly half of the world

steel (circa 716 million tons), but succeeds only in part to cover this demand with the internal

resources of iron and coal, having to resort to imports for the remaining amount. Most of these are

from the Australia, that is the fourth largest producer of coal about 431.2 million tons, 5,5% of the

total world production, and it has the largest reserves of uranium, lead, silver, zinc, titanium and

tantalum. In 2012, Australia exported 495 million tons of iron ore and coking coal 143, with a

percentage of the world total respectively 27% and 46%, and with an incomes of $64 billion and

$21 billion. Most of the drawings are made in the north west of the country, particularly in the

Pilbara region, where the largest producer of iron ore, Rio Tinto, produced in 2012, 240 million tons

against 160 million tons in the second producer, BHP Billiton.

The third commodity for export value is the thermal coal (about $13 billion in 2012). Follow, gold

and aluminum from which Australia obtains about $10 billion and $7 billion, then copper $6.5

billion, gas $4.4 billion and nickel $1.8

billion.

The Chinese research of raw materials and

the variety of Australian resources have

contributed to a significant increase in

investment in Australia by multinationals

(Rio Tinto and BHP Billiton), and by

small/medium businesses involved in the

mining industry.

Since 2013 the investment trend has reversed and these have declined from the previous year

because of any factors such as lower commodity prices caused by the slowdown of the Chinese

economy, and because of the development costs increased to levels above the inflation. The result

of this was a reduction in investment and jobs.

Furthermore, the benefits of the increase in commodity price have not been borne equally by all

sector of the economy, and a relatively strong Australian dollar has resulted in a negative impact on

parts of the export sector that have not directly benefited from the resource boom, such as part of

manufacturing sector. Mining, construction and manufacturing industries are the most affected

industries by commodity price shock, while in comparison, the profits and the output of the

financial and insurance sector is found to be relatively unaffected.

According to some studies, the value of the mining output and industry profits increase substantially

in response to commodity price shock. On the contrary, impulse responses show that the volume of

real mining output responds negatively to commodity price shock. This is partly due to rising

commodity prices encouraging extraction of more marginal deposits, which requires more

intermediate input per unit of output.

Also parts of manufacturing sector has received benefits. The output increases in response to a

commodity price shock, however profits only increase initially before declining, highlighting

increased cost pressures in manufacturing in the longer term.

Overall, the effects of external booms in both the Chinese direct demand shock and the general

commodity price shock are not positive for Australia over the longer time horizon. The floating

exchange rate policy in Australia has helped significantly to stabilize the economy in the presence

of commodity price shocks but the increase in commodity prices substantially increases the value of

the Australian currency which reduces competitiveness of Australian exports. The Australian dollar

has doubled in value against the U.S. dollar over the past decade, as foreign companies bought up

the currency to invest in mines. That has made exports more expensive and imports cheaper,

contributing to an increase in living costs. There is some evidence of Dutch Disease, as resources

transfer from the non-resource sector to the resource sector. The sectors most susceptible to this

phenomenon are price-sensitive commodity-linked export industries, such as manufacturing and

agriculture. In Australia these sectors have been in structural decline for decades. Today, Australia

manufacturing output is already down to 7% of GDP, the lowest in the OECD while the falls in the

total number of people employed in manufacturing and the sector’s employment share are going to

accelerate.

Environmental Problem

The unbearable air pollution in China

The China's environmental problems can be summarized under six main headings: air, water, soil,

habitat destruction, biodiversity losses, and megaprojects.

China’s air quality is dreadful, the air pollution in some cities is the worst in the world, with

pollutant levels several times higher than levels considered safe for people's health.

Acid rain has spread over much of the country and is now

experienced in one-quarter of Chinese cities for more than

half of the rainy days each year.

As the air also water quality in most Chinese rivers and

groundwater sources is poor and declining, due to industrial

and municipal waste water discharges, and agricultural and

aquaculture runoffs of fertilizers, pesticides. About 75% of Chinese lakes, and almost all coastal

seas, are polluted.

This is a big problem because China is poor in fresh water, with a quantity per person only one-

quarter of the world average value. China also already has the world's worst problem of cessation of

river flows, and that problem is becoming much worse because water continues to be drawn from

rivers for use.

Soil quality and fertility as well as soil quantity have declined, partly because of long-term fertilizer

and pesticide that caused about 50% decrease in the area of crop-land considered to be of high

quality. China's soil problems start with its being one of the world's countries most severely

damaged by erosion, now affecting 19% of its land area.

Salinization and desertification are the most serious dangers for China. The first has affected 9% of

China's lands, mainly due to poor design and management of irrigation systems in dry areas. The

second due to overgrazing and land reclamation for agriculture, has affected more than one-quarter

of China, destroying about 15% of North China's area

The destruction of habitat is mainly due to deforestation and destruction of grasslands. Today only

16% of the territory is covered by forests, deforestation also contributes to soil erosion, flooding

and probably also to the increase of drought. The grasslands instead cover 40% of the country, but

overgrazing and mining have caused serious damage, so that today 90% of grasslands is degraded.

From the side of the loss of biodiversity, one of the biggest problems is the depletion of fish stocks,

both marine and freshwater. Some fish are on the verge of extinction while others have to be

imported. The high biodiversity of the country is now in danger, many s characteristic species are

on the brink of extinction while the non-native

invasive species are increasing.

In addition, more than 2/3 of China's cities are

now surrounded by trash whose composition has

changed dramatically from vegetable leftovers,

dust, and coal residues to plastics, glass and

metal.

All these environmental problems involving heavy social and economic costs, in addition to

increasing the risk of environmental disaster. Examples of these costs are 250 million lost by the

Xi'an City because of interruptions of water or the losses caused by acid rain that correspond to

about 730 million per year.

On the other hand, the consequences on humans are terrible, 300 000 children who died a year and

54 billion health care costs (about 8% of GDP) are caused by air pollution. Natural disasters such as

floods, dust storms, droughts and landslides, are becoming more frequent and destructive, causing

more damage and more casualties. Main cause of pollution is the increase in exports. Most of the

small Chinese companies are polluting and inefficient, produce 50% of exported goods but also of

waste that remains on Chinese soil. Moreover, Western countries export their waste in China,

because the Chinese manufacturing industry accepts waste to recover and to use as raw material at

low cost.

The Chinese government is implementing reforms and planning for environmental protection, but

the country's economic growth cannot be stopped. China is between sprawl and environmental

awareness. The large population, the growing economy and the strong centralization of decision

making is that the possible choices of the nation in both directions are global.

In summary, China has the largest population and the faster economic growth, although rates of per

capita consumption are low. However, if these rates were to reach the levels of the first world, with

the same condition, humanity would need twice the available resources. The demand for steel and

aluminum would increase by 94% just to meet demand in China. What would remain of Australia?

The large mine

The Australian mining industry, whose induced contributes to national GDP to about 9%, must deal

with the need to safeguard the precious environmental characteristics of the country. The extractive

nature of mining operations creates a variety of impacts on the environment before, during and after

mining operations. The risks related to these operations are mainly the acidification of the soil,

caused by contact of highly sulfurous mineral water and oxygen and the contamination of aquifers

with heavy metal residues.

The essence of mining is to exploit resources that do not renew themselves with time, and hence to

deplete those resources. The miners extract mineral from a lode as rapidly as is economically

feasible, until the lode is exhausted. Mining minerals may thus be contrasted with exploiting

renewable resources that do regenerate themselves by biological reproduction or by soil formation.

Renewable resources can be exploited indeterminately, provided that one removes them at a rate

less than the rate at which they regenerate.

Australia has been and still is "mining" its renewable resources as if they were mined minerals. That

is, they are being overexploited at rates faster than their renewal rates, with the result that they are

deteriorating. At present rates, Australia's forests will disappear long before its coal and iron

reserves, which is paradoxical in view of the fact that the former are renewable but the latter aren't.

Exploitation of these resources as if they were mining deposits has created enormous damage:

erosion, land degradation by salinization, deterioration of water quality, loss of agricultural

productivity and damage to the barrier reef. Australia is now the continent with fewer forests in

relation to its size, only 20%. The country imports a quantity of forest products three times more

than it exports, more than half is made up of paper and cardboard.

Australia is also the most unproductive continent: the one whose soils have on the average the

lowest nutrient levels, the lowest plant growth rates, and the lowest productivity. That's because

Australian soil is very old. The low average productivity of Australian soils has had major

economic consequences for Australian agriculture, forestry, and fisheries. Low soil productivity

means low growth rates and low average yields of crops, so essentially nutrients must be added

artificially with fertilizer.

In Australia, not only the soil is poor, even the freshwater and coastal wildlife are relatively

deprived, so the exploitation of fish quickly reached excessive levels.

The other big problem of Australia's soils is that in many areas they are not only low in nutrients but

also high in salt. Salinization is mainly caused by the practice of irrigation and dry farming which

tend to bring back up the salt in surface. Irrigation salinization

has the potential for arising in dry areas where rainfall is too

low or too unreliable for agriculture, and where irrigation is

necessary. Dry land salinization operating in areas where

rainfall suffices for agriculture. Through this practice, native

vegetation is deleted and replaced with the crops, in this way

the soil remains bare and the water that penetrates the layer

reaches salty allowing the salt to rise. Salinization inflicts heavy financial losses on the Australian

economy. First, it is rendering much farmland, including some of the most valuable land in

Australia, less productive or useless to grow crops and raise livestock. Second, some of the salt is

carried into city drinking water supplies.

Today, this phenomenon affects 9% of all agricultural land in Australia, and with these rhythms

growing quickly reach 25%.

Australia is a highly developed country that can put an end to this exploitation in a relatively short

period, however, could have economic repercussions in the short term.

On the other side if the government does not intervene, the fragile environment of the Australian

could collapse, in that case, the economic damage would be even greater. According to some

studies, more than 99% of agricultural land contributes little to the economy while it appears that

about 80% of the profit comes from agriculture less than 0.8% of the cultivated land.

In a nutshell, Australia illustrates in its most extreme form the wild ride in which is involved the

modern world.

References

-Joaquin L. Vespignani and Stephen J. Knop, The sectorial impact of commodity price shock in

Australia University of Tasmania, January 2014.

-http://comtrade.un.org/

-http://atlas.media.mit.edu/

-Shaun K. Roache, China’s Impact on World Commodity Markets, IMF Working Paper, May 2012.

-Brendan Coates and Nghi Luu, China’s emergence in global commodity markets

-Mardi Dungey, Renée Fry-McKibbin, Verity Linehan, Chinese Resource Demand and the Natural

Resource Supplier, CAMA (Centre of Applied Macroeconomic Analysis), August 2013.

-Jared Diamond, Collasso: Come le società scelgono di morire o vivere, Einaudi Editore, Torino,

2005.