Australia-China FTA adds to rivalry in soft commodities

Australia's free trade agreement with China heralds a renewed focus to diversify the country's economy away from a reliance on mineral exports to soft commodities and intensifies competition in a "hotly contested" market.

Australian Prime Minister Tony Abbott labelled the deal between New Zealand's two-largest trading partners, "at least as good as New Zealand's" while unnamed government officials said it gives Australian dairy better access than New Zealand. The FTA comes after nearly a decade of negotiations between New Zealand's two largest trading partners, and some six years after New Zealand signed its own FTA with China.

"New Zealand has basically redeveloped their economy and is rebalancing their books on the back of basically one commodity - dairy," agriculture minister Barnaby Joyce told Australian media after the FTA was announced. "If Australia can match that, then that's a great assistance to our nation and how we pay our bills and rebalance the books, especially in the current downturn in some of the rocks we sell - coal and iron ore."

Two-way trade between Australia and China was worth A$150.9 billion in 2013, half its total global exports, with exports of iron ore worth A$52.7 billion, followed by A$9.1 billion of coal shipments. Trade between New Zealand and China was worth $18.2 billion in 2013, with kiwi exports making up $10 billion, of which $4 billion was milk powder. 

Australia's economy has benefited from a building boom in China and rising iron price, which are the main raw material needed to make steel. Still, since the start of the year iron ore prices have tumbled 46 percent, and recently traded at a five-year low, amid concerns China's economy growth is slowing. 

Meanwhile, a growing Chinese middle class of consumers want premium imported foods. Fonterra Cooperative Group, the world's biggest dairy exporter, is forecasting the Chinese market for infant milk powder formula will grow to $33 billion in 2017 from about $18 billion.

“China’s a large market with growing demand for dairy," Robb Stevens, Fonterra general manager of trade strategy said in an emailed statement. "It presents many opportunities for the dairy exporters in a range of products.”

Australia's wealthiest woman, and iron ore tycoon, Gina Rinehart announced plans last week to invest A$500 to build one of Australia's largest dairy farms in partnership with a Chinese company, China National Machinery Corp. Hope Dairies, which is majority owned by Rinehart, plans to tap into Chinese demand for infant milk powder formula, and export 30,000 metric tonnes a year with production starting in 2016. 

In the 2013 year New Zealand exported 700,540 tonnes of milk powder, which includes skim and whole milk powder as well as infant formula, to China.

Pat English, chief executive of the New Zealand China Council, thinks Australia's deal with China will have a flow on effect, and the added competition isn't likely to hurt New Zealand in what is already a hotly contested market. The challenge for New Zealand lay in building on the six-year head start it had in terms of its own FTA and adding value to the volume. 

China and New Zealand's relationship “has become more sophisticated," English said "But equally it has become more challenging because you have over 130 countries that have China as their main trading partner, so they know what we know and they’re putting a lot of effort into it as well, so we have to step up and really make more of an effort."

(BusinessDesk)