China trade rally could be ‘false dawn’, warns industry veteran

Jon Condon, 08/01/2013


Excitement over the recent performance of China as an expanding market for Australian beef may need to be kept in check, an industry stakeholder who has been closely associated with emerging Asian markets for more than 30 years has suggested.

After years of being earmarked as ‘the next big thing’ in Australia’s export trade, beef shipments to China started gaining some real traction during the latter stages of 2012.

The market registered its third consecutive monthly shipment record in November, taking 7955 tonnes of Australian beef for the month – enough to rank China as our fourth largest beef export customer for the period. For the full calendar year, China took 32,900t of Australian beef for 2012, almost four times as much as a year earlier.

However early enthusiasm about the recent rapid rise should be tempered with caution, suggests Meat & Livestock Australia senior staffmember Tim Kelf.

Mr Kelf leaves the producer company later this month after working for MLA and its predecessor, the Australian Meat & Livestock Corporation for the past 33 years (see separate profile this morning).

For more than two decades he was the producer company’s manager of the South East Asia/Chinas region, giving him a strong insight into the challenges and opportunities Australia faces in the market.

It was around 1996 – about the time of publication of Dr John Longworth’s seminal book, Beef in China (underwritten by AMLC) – that some early work was carried out looking at beef export opportunities in the world’s most populous nation.

‘Informal’ trade channel continues to exert influence

The so-called ‘informal’ or ‘grey’ channel (beef exported to neighbouring countries, but then moved ‘informally’ over the border into China) was evident and active even back then, Mr Kelf said.

More recently, some China market analysts have speculated that between muscle meats and offals, beef trade volumes of up to 500,000 tonnes currently enter China each year via the ‘informal’ route.

Statistics show that about 300,000t of Indian buffalo meat entered Vietnam, alone, which would lend to support that estimate, given that Vietnam shares a lengthy border with China. Equally, the Hong Kong informal channel is regarded as well organised, and active.

Another little known channel for beef into China is Cambodia. Surprisingly, the single biggest export market for Japan’s prized Wagyu premium beef is Cambodia, suggesting much of this, too, could end up in the larger and relatively wealthy China market.

“I don’t believe the ‘informal’ trade into China will ever completely disappear – at least in my lifetime,” Mr Kelf said. “It plays a role as a safety valve for the Chinese, being turned off and on as the market forces require. It also it provides an opportunity to informally manage market access issues whilst attempting to resolve them through formal negotiation,” he said.

Mr Kelf asserted that it was recent clamping down by Chinese authorities on the ‘informal’ channel, together with reduced domestic Chinese beef production, which had driven the surge in trade out of Australia seen over the latter stages of 2012.

The Chinese beef industry is reportedly going through a transition from an industry largely dependent on the ‘beast of burden’ livestock supply chain to a more commercial and professional livestock supply chain. The dairy sector is also seen as becoming a major source of cattle for slaughter through the provision of bull calves into the supply chain as well as a source of cull cows.

However this transition is proceeding relatively slowly, and in the interim, local beef production is expected to be constrained. Imports are being used to offset any supply shortfall, and Australia is the country best positioned to supply that.   

“It is easy to argue that the increase in formal imports is not being driven by any sudden, overnight increase in demand from Chinese consumers, but a reduction in available supply of domestically-produced beef in the local supply chain, which has been exacerbated by the Chinese Government’s decision to clamp-down on informal imports,” Mr Kelf said.

It is thought that the recent clampdown is like to be temporary, however.

The distinction for Australia, however, is that we have relatively more beef abattoirs formally approved for export to China than any other beef supply competitor. China issues permits to individual processors, rather than on a country basis. Currently about 49 Australian establishments are accredited for China. This means relatively more Australian product is arriving via the direct, authorised channels.

In contrast, Brazil has only a small number of beef plants licensed for China, and is currently under further limitation since the report of BSE in an aged cow in December.

The US has not re-established effective access to China since its BSE case in 2003. Hence they are unable to supply through the formal channel into China.

Australia is in the ideal position to supply during this time of limited local supply and limited import access. The development of substantial exports to China will continue to exist, however in the future any change in these two supply restrictions could see a reversal, to some degree, in Australia’s exports, Mr Kelf said.

In the area of high quality chilled beef exports, Australia is expected to continue to grow and be a leading participant in this sector.

“With the relatively high number of beef plants approved for China, Australia’s quality loin cuts and chilled beef trade into the market is quite strong and expected to grow strongly from a relatively small base” he said.

While the recent surge in the manufacturing beef trade out of Australia has primarily been in 50CL (chemical lean) and 65CL product it is also been in 85CL as well which apparently is due to local beef suppliers struggling to find local raw material to supply to major Quick Serve Restaurant (QSR) chains. There has been substantial growth in the QSR sector and this is expected to continue as the middle class expands in China.

Export volumes could ease again

Should the ‘informal’ supply channel into China start to free-up again during 2013, it could well see Australia’s direct ‘front-door’ shipments start to fall away again in volume, Mr Kelf said.

“Australia may have a six-month opportunity in China at the level of trade we are currently experiencing, while the tighter controls are in play,” he speculated. “It is hard to tell, but it is worth considering when assessing the future opportunities in China for Australia.” 

 “At the risk of sounding a little temperate, unfortunately the current rise in Australian beef trade may not be the ‘big one’ that everybody has been anticipating for so long. It literally skyrocketed overnight, but that is often not a healthy or sustainable way for a new trade to evolve.”

“But even if it is a bit of a false-dawn, it’s not necessarily a bad thing. I’ve always taken the view that Australia’s opportunities in mainland China will at least for a period be at the higher-quality end, at least until the nature of the local supply and the import trade evolves more.”

The good news was that beef is becoming a real status food product, in the eyes of many Chinese consumers, Mr Kelf said.    

Particularly in the country’s more northern regions, Chinese people were increasingly putting beef on their tables and menus as a status item, he said. That was partly because it cost more than other popular protein options like pork and chicken, but also because it was much harder to source.

All this suggests that Australia’s future in beef trade with China remains squarely at the higher end of the market, via direct trading channels into the food service and retail segments.

“Ever since the days that Leith Tilley (now brands manager with T&R Pastoral) was MLA’s country manager in China, our strategy has focussed on the higher-end chilled beef trade. If we can win the five-star segment from US beef, ensuring that every time a Chinese consumer goes to the Grand Hyatt hotel or similar, they are seeing Australian beef on the menu. The residual effect, we believe, will be that they will follow that preference when making purchases at higher-end retail supermarkets,” Mr Kelf said.

“As the modern retail supermarket sector grows in China, that’s where Australia should get its retail growth,” he said.

“That’s been made easier because the American product has not been there for so long now. But it’s more of a case of whether we can sustain it, as the market grows.”

Is China losing its domestic beef production capacity?

Mr Kelf said one of the big changes that appeared to be happening in China’s own beef industry was that the smaller, more fragmented part of the domestic beef production sector was starting to disappear.

“Huge numbers of smallholders that had two or three head of cattle to provide ‘cow-power’ and to supplement their farm income are now moving towards working in urban and peri-urban areas,” he said.

Credible information now being picked-up was suggesting that, as a result, China’s beef herd may have declined dramatically since 2007 – possibly going from around 120 million head to around 90 million.

“The problem with China is accessing reliable statistics, but the background facts are that there has been a huge population drift from rural to urban communities, and the Chinese appetite for beef consumption is now growing – and much faster than what was seen earlier,” Mr Kelf said.


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