China could face a significant challenge to its energy security if it tries to strike back against Australia for its plan to acquire nuclear submarine technology from the UK and US.

On September 16, Beijing blasted the announcement a day earlier that Australia will join a new security partnership known as AUKUS that plans to develop a fleet of nuclear-powered submarines “to maintain the peace and stability throughout the Indo-Pacific region “.

During a press conference, Chinese Foreign Ministry spokesman Zhao Lijian made it clear that China did not buy insurance from senior US officials during a substantive briefing at the reporters that the security initiative “did not target or concern any country”.

The submarine deal “seriously undermined regional peace and stability, intensified the arms race and undermined international non-proliferation efforts,” Zhao said, according to a ministry transcript.

“China still believes that any regional mechanism should (…) help strengthen mutual trust and cooperation among countries in the region. It should not target any third party or harm its interests,” Zhao said.

Western media interpreted the AUKUS Pact as a response to China’s military build-up and territorial claims in the South China Sea.

As part of the plan to provide Canberra with more capable and stealthy submarines, “Australia could conduct routine patrols that could cross areas of the South China Sea that Beijing now claims to be its own exclusive zone. , and extend as far north as Taiwan, ”said the Guardian.

Although the conventionally armed but nuclear-powered ships are not expected to be launched until the end of the next decade, the plan could open a new chapter in China’s campaign of retaliation against Australia’s short-term trade and economic interests.

Despite a free trade deal since 2015, China is punishing Australia for policies ranging from its support for Hong Kong democracy dissidents to its calls to investigate the origins of COVID-19.

Over the past two years, Chinese authorities have imposed cuts and crackdowns on Australian exports of products such as wine, barley, lobster, copper and coal.

The retaliatory measures have mainly focused on products Beijing can afford to forgo, although analysts are divided over whether the Australian coal ban has contributed to shortages and record prices of China’s main fuel this year. year.

So far, authorities have been careful to avoid restricting imports of Australia’s largely irreplaceable iron ore for fear of harming China’s steel industry.

But even that safe haven for Australia could be endangered as China cuts steel production to meet its emissions targets and real estate development falters due to growing risk of debt.

Commercial friction

In mid-September, iron ore futures fell to double digits following reports of tighter production controls, PMN Business news reported.

While China no longer has Australian trade categories it can safely punish, it might be tempted to strike back at its liquefied natural gas (LNG) supplies, the country’s second largest raw material import after ore from iron.

For now, Australia remains China’s main supplier of super-refrigerated fuel, accounting for 45% of its LNG imports until that share recently dropped to 43%, according to UK-based energy consultants , Wood Mackenzie.

“I don’t think China can afford to cut Australian imports of LNG anytime soon,” said Mikkal Herberg, director of energy security research for the Seattle-based National Bureau of Asian Research.

“This winter would be disastrous to do so. LNG is basically sold around the world,” Herberg said via email.

In May, Bloomberg News reported that two of China’s smaller traders had been urged to avoid purchasing new LNG shipments from Australia, although no similar signal was sent to major importers in the country. , the national oil companies (NOC).

In June, Wood Mackenzie said in an article that the report on the LNG restrictions was “unconfirmed,” but it could have been an indicator of pressure for wider restrictions to come.

The potential to target the Australian LNG trade has been closely watched this year due to a collision of factors.

After a decline that continued until February, Asian LNG spot prices hit record highs as China overtakes Japan to become the world’s largest buyer.

Soaring prices have reportedly made some Chinese importers reluctant to buy more LNG, but building up stocks before winter has combined with pressure to cut carbon emissions from coal, pushing spot prices up even more.

Record gas prices, low storage levels and shortages in Europe have resulted in further tightening.

Some buyers are hoping that prohibitive LNG prices will eventually force a change of fuel and moderate demand, S&P Global Platts said.

Energy and climate

But China’s demand for pipeline gas and LNG is high despite rising costs as the country faces pressure to limit coal and meet climate targets.

In the first eight months of the year, combined gas imports jumped 22.2 percent from the previous year, accounting for more than 44 percent of China’s fuel supplies, according to data from the National Bureau of Statistics (NBS).

Despite bilateral tensions, LNG shipments from Australia to China increased in August with nine more shipments compared to July, the Australian Financial Review reported, citing an analysis by consulting firm EnergyQuest.

Chinese LNG imports soared 23.3% through August, based on customs figures, reported.

In the longer term, the Australian submarine deal could be a strategic situation for China, whose energy security is at the heart.

Beijing’s claims to the South China Sea were driven in part by its needs for offshore resources and demands for control of its vital trade routes for energy imports.

But with a fleet of silent nuclear submarines patrolling the disputed waters, claims of control and problems of free passage may remain unresolved.

In the short term, China’s attempts to punish Australia for the AUKUS initiative may only succeed in swapping one vulnerability for another by highlighting its dependence on imported energy into the countries. same waters.

While the deployment of Australian nuclear submarines may be far into the future, China’s dependence on imported energy is also expected to continue for years to come.

“Their domestic gas production targets are already very ambitious and still involve increasing dependence on imported gas,” Herberg said.

“It is difficult to see when the LNG market will be sufficiently supplied to allow a possible change,” Herberg said. “It is only in the event that the global LNG market becomes in huge surplus that they might consider phasing out Australian LNG.”

“I would put LNG in the same basket as Australian iron ore. It’s very difficult for China to diversify away from Australian iron ore, so they just ignore the contradiction,” he said.

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