OPINION: An escalation in political tensions between China and Australia has put the liquefied natural gas sector firmly in the spotlight.

China's National Development & Reform Commission (NDRC) last week announced an “indefinite suspension” of all activities under the China-Australia Strategic Economic Dialogue, accusing "some Australian Commonwealth Government officials" of launching "a series of measures to disrupt the normal exchanges and co-operation" between the major trading partners.

The body went further by claiming this was done "out of [a] Cold War mindset and ideological discrimination".

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Discourage investment

Although the latest move is expected to discourage Chinese investment in Australia’s natural resources sector, Beijing is unlikely to call a halt to imports of all Australian commodities — such as LNG or iron ore — as this would impact its domestic economy.

However, further action could see China increase the administrative cost of such imports.

“Given the strong position that the Chinese government is demonstrating and the Chinese economy’s manageable reliance on Australian supply, it is unlikely to back down before the Australian government does,” said Yanting Zhou, senior economist at energy analyst Wood Mackenzie.

China relies heavily on Australia's LNG, with Australian liquefaction projects accounting for 46% of the 6.2 million tonnes it imported in April 2021.

State-owned China National Offshore Oil Corporation alone has a 25-year, 3.3 million tonnes per annum contract for volumes from Australia.

Such huge deals and Chinese equity stakes in Australian commodity projects are expected to stand the test of the tit-for-tat policy exchanges between Canberra and Beijing — at least for now.

Chinese companies have been reluctant to sign new long-term LNG contracts with Australian producers since tensions escalated last year, exacerbated in part by Canberra seeking an investigation into the origins of the Covid-19 pandemic.

Now, at least two smaller Chinese LNG importers have been told by government officials not to buy cargoes from Australia, Bloomberg reported this week.

Australia may tighten restrictions on Chinese investments in some sectors in response to the “indefinite suspension”.

However, China can be expected to increasingly diversify its suppliers of commodities — including LNG — away from Australia.

(This is an Upstream opinion article.)