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
Australias 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,
China is a giant developing country and

although
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. Chinas 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 Chinas 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 5 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. Chinas 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 worlds 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 Chinas 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 worlds arable land and about 6% of the worlds water supply but has
more than 20% of the worlds population. China is the worlds 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 worlds largest consumer of fertilizer.
Nevertheless, with rising agricultural demand
and slowing agricultural productivity growth,
Chinas 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 Chinas 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, Chinas
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 worlds largest consumer and producer of coal with 13% of the
worlds 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 Chinas 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, Chinas
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%).
Chinas 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%.

Chinas 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 Australias 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 sectors 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.
Chinas 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 onequarter 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, Chinas Impact on World Commodity Markets, IMF Working Paper, May 2012.
-Brendan Coates and Nghi Luu, Chinas emergence in global commodity markets
-Mardi Dungey, Rene 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 societ scelgono di morire o vivere, Einaudi Editore, Torino,
2005.