Macro Intelligence: China thaws beef ban, serving up warmer trade relations

Article written by Nadine Blayney (ausbiz)

China lifts ban on Aussie beef

China lifted a ban on imports from five major Australian beef processing facilities last week, in yet another sign that trade tensions between the two countries are easing. China imposed beef bans between 2020 and 2022 as part of a broader move to restrict imports of key commodities, including coal, timber, seafood, and wine. The restrictions were in retaliation after the Australian Government called for an independent investigation into the origin of COVID-19.

Despite the bans, Australia continued to export beef to China. In fact, beef exports to China increased by 26% year on year in February.

Greater China beef market and Australian exports

Australia's trade with China has faced significant disruptions due to rising tensions in recent years. China imposed several trade restrictions on Australian exports post-COVID, resulting in a AUD 20.6 billion reduction across commodities like iron ore, coal, and gas. However, the easing of some bans has allowed over AUD 11.5 billion worth of barley, cotton, hay, wine, coal, copper and timber exports to resume.

Australia is the world's second-largest beef exporter after Brazil, with China its top two-way trading partner accounting for 27% of total goods and services trade valued at AUD 204 billion in 2023, mainly led by iron ore, coal, gas and education exports.

"As a top priority, we are working closely with the government and Chinese authorities to lift the remaining suspensions on Australian red meat exporters," said Patrick Hutchinson, CEO of the Australian Meat Industry Council. "This will restart lucrative new market opportunities that many businesses have been awaiting."

Australia's Foreign Minister Penny Wong emphasised ongoing efforts to fully restore trade ties with the economic powerhouse.

Top Australian export commodities ranking

Is education the next trade frontier?

While Beijing has lifted most barriers imposed on Australian goods, including wine in March, key trade impediments remain, such as restrictions on Australia's rock lobster industry. "We continue to press China to remove the remaining trade impediments," said Australian Foreign Minister Penny Wong after the lifting of the meat ban. With bilateral trade a priority, Chinese Premier Li Qiang is visiting Australia later this month.

Chinese students make up around 30% of international students in Australia, a significant portion for the nation's fourth-largest export industry. The government plans to implement "soft caps" or limits on future international student intake to ease housing pressures. "With visa grants back to pre-pandemic levels, we must manage numbers more strategically long-term," noted Minister for Home Affairs Clare O'Neil. A framework for the international education sector, including these controlled intake measures, will be released later this year.

China trade stocks to watch

• IDP Education (ASX: IEL)

As Australia moves to enforce tighter regulations on international student intake, including potential caps and more stringent visa requirements, the education sector is bracing for disruptions. Stocks of listed education providers have already felt the impact, with IDP Education (ASX: IEL) shares falling over 15% in recent weeks on policy uncertainty.

Analysts at UBS flag caution around potential share price depreciation for IDP Education due to uncertainty around the specific policy changes and the related earnings impact. "We see IDP Education's EBIT in the second half of 2024 falling by 21% as these reforms take shape," UBS analysts note. "While negativity is already priced in, the extended policy uncertainty could prolong the share price recovery."

IDP Education daily chart

Analysts cut price target, downgrade stock rating

Analysts at Jefferies recently lowered their price target for Australia's IDP Education from $16.00 to $15.80. They expect the education services provider's 2H24 International English Language Testing System (IELTS) volume to decline by 8%. Consequently, they are lowering revenue forecasts for FY24 to FY26, with adjusted EBIT and net profit projections reduced by 1% to 6%. The stock currently holds an 'underperform' rating.

Analyst recommendations: mean rating and price target

• Australian Agricultural Company (ASX: AAC)

On a brighter note, as trade barriers are lifted, some ASX stocks stand to benefit. One such example is Australian Agricultural Company (ASX: AAC), which has seen its share price appreciate following the beef announcement on May 20.

AAC four-hour chart

Bell Potter's stock rating

Australian Agricultural Company reported full-year earnings this month, with underlying earnings down 25% to AUD 67.4 million. AACo’s revenue reached AUD 336.1 million, although its margins declined. The company described conditions as “challenging,” with cattle prices hitting a four-year low in FY24.

In the wake of these results, Bell Potter retained its ‘buy’ rating on the stock, citing rebounding domestic cattle prices and noting that the stock remains undervalued relative to meat price indicators. Additionally, agricultural land and water asset values have remained robust over 2023. Bell Potter has set a price target of AUD 2.00 for the stock.

Analyst recommendations: mean rating and price target

• Treasury Wine Estates (ASX:TWE)

Wine was the poster-child for trade tensions with China until tariffs were dropped at the end of March after more than three years. The tariffs battered the Australian wine industry, with exports to China collapsing from AUD 1.24 billion in 2019 to less than AUD 1 million in 2023.

While the abolition of the crushing tariffs revived Treasury Wine Estates' (ASX: TWE) share price, the company warned that the earnings impact from the re-establishment of its China business would be minimal through FY24, with increased shipments to be offset by the step-up of offshore costs.

“This is a medium-term growth opportunity that we will pursue in a deliberate and sustainable manner, focused on growing our portfolio in China while continuing the strong momentum that we have delivered in several global markets over recent years,” Treasury Wine Estates’ CEO Tim Ford said.

Treasury Wine Estates daily chart

Positive long-term outlook according to UBS

UBS says, in addition to Treasury Wine Estates' recent acquisition of US-based DAOU, the company’s expansion in China is seen as a positive for the long-term outlook. UBS has a ‘buy’ rating on the stock with a price target of AUD 15.25.

Morgan Stanley says Penfolds volumes and pricing should be supported by the removal of Chinese tariffs. It points to meaningful upside over FY27/28 as increased luxury volumes become available for sale. Morgan Stanley has a price target of AUD 14.50 and an ‘overweight’ rating on the stock.

Analyst recommendations: mean rating and price target