Russia's invasion of Ukraine worsened China's relations with the red bear
country. The rift in relations between the two countries has made the prices
of energy, industrial and agribusiness commodities even more soaring.
Citing Bloomberg Monday (21/3), in spurring economic growth, China is in
dire need of coal and gas. Despite having domestic energy sources, the
country is still lacking and dependent on imports.
Currently, Russia is the second largest coal exporter to China after
Indonesia, while its gas exports have grown rapidly since the Power of
Siberia pipeline began flowing in 2019.
Crude oil shipments have also risen higher in recent years, including
pipeline oil, Russia's second supplier to China in 2021, only behind Saudi
Arabia.
Russian coal has helped fill the gap caused by China's ban on Australian
shipments since late 2020, and more recent disruption to cargo from Mongolia
and Indonesia.
But after the invasion, Chinese buyers, and the lenders who financed their
purchases, have largely avoided shipping Russian coal and LNG and crude oil.
The hesitation may be temporary given the unknown end point of international
action against Moscow.
But it could also reflect deeper corporate concerns about the entanglement
of sanctions that could affect global banking arrangements, as well as
governments' fears of exiting the much more important market for Chinese
goods.
"For any Chinese company with large operations overseas, continued access to
the US financial system is more valuable than any deal that can be struck
with Russia, although some smaller firms may be willing to take the risk,"
Capital Economics said in a note last week. .
Logistics is also a problem. Several Chinese coal importers and Russian
miners met this month to discuss increasing volumes, but cited several
obstacles, including whether China's yuan-based cross-border payment system
would be usable, as well as problems with transportation capacity and coal
quality, according to the China Coal Transport and Distribution Association.
To be sure, China is committed to the long-term success of Russia's largest
energy project. Another gas pipeline is under discussion, and Wood Mackenzie
Ltd. estimates China's oil and gas investment in its neighbor at US$24
billion, including stakes in Russia's Yamal and Arctic LNG projects.
It is unlikely that China will follow international firms and exit Russia's
energy assets, said Neil Beveridge, a Hong Kong-based senior energy analyst
at Sanford C. Bernstein.
“China has this huge growth opportunity for Russia.”
Rising transportation costs are also likely to be an obstacle for Moscow to
expand its grain sales. Russia sells wheat to more than 100 countries, but
China has become one of the few big markets to penetrate.
Until recently, shipments were restricted as most Russian wheat was banned
due to mold problems.
In February, China gave the green light to import wheat from across Russia
as part of a deal sealed during Vladimir Putin's visit to Beijing.
The move is expected to challenge sales from countries such as France,
Australia, Canada and the US.
But even if the restrictions have been lifted, China will likely continue to
import from its usual sources, said Darin Friedrichs, co-founder and
director of market research at Sitonia Consulting in Shanghai.
“I don't think it's feasible to import large quantities from a new source
like Russia. They have to pay more," he said.
For some metals, China's dependence on Russia has only weakened in recent
years. Indonesia has emerged as a major supplier of nickel. Although
Russia's share of refined copper imports has increased, the expansion of
China's smelting industry means that imports of ore directly from miners in
places like South America are becoming more important.
China already buys the bulk of Russia's refined copper exports, according to
a note from UBS AG this week, showing limited upside.
For palladium, which is mainly used to reduce car pollution, Russia's
exports to China have increased in recent years, and could theoretically
increase even further.
A potential constraint, according to UBS, is that European-listed companies
manufacture most of the catalytic converters sold in China, and they may not
want Russian supplies.
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