OREANDA-NEWS. July 11, 2014. Australia still has the Union Jack on its flag and the British queen on its coins, and was once described as the U.S. "deputy sheriff" in Asia, but the real dependency relationship is with China. Nowhere is this reality made more clear than in the quarterly outlook by the Bureau for Resources and Energy Economics (BREE), the government agency responsible for commodity exports and other forecasts.

In the 2002-03 fiscal year, the biggest buyer of Australian resource and energy exports was Japan, which took 15 percent and 39 percent of the respective totals, according to BREE's Resources and Energy Quarterly published June 25. China was the fifth-biggest buyer of resources and sixth for energy, with a share of 8 percent and 3 percent respectively. But by the 2012-13 fiscal year, China had accelerated into the top buyer of resources, with dominant share of 52 percent, and was second in energy purchases, taking 15 percent, behind Japan's 41 percent.

It's also likely that in years to come China will replace Japan as the top buyer of energy exports from Australia, given that Japan's imports of liquefied natural gas (LNG) are probably at their peak, while China is just starting to ramp its purchases of the super-chilled fuel. Australia has seven LNG plants currently under construction, and by the time these are all operational around 2018, LNG will become the nation's second-biggest commodity export, trailing only iron ore. Resource and energy exports accounted for 70.2 percent of all exports in 2012-13, up from 48.9 percent a decade earlier, underscoring just how vital commodity exports are to Australia's economic wellbeing.

There is little doubt that Australia's current economic wealth is very much related to China's rapid urbanisation and its surge in commodity imports over the past decade. From a political perspective, it's probably less than ideal to be largely dependent on the economic fortunes of one major trading partner, especially one that with whom relations are somewhat testy. But it's equally hard to see just how Australia can diversify its export base, given China remains the driver of commodity demand and changes in its import appetite will dwarf any changes from other nations, even rapidly industrialising, high-populations Asian countries such as Indonesia and India.

Iron ore is a case in point, with Australia becoming increasingly dependent on Chinese buying. Australia, the world's largest iron ore exporter, will ship 680 million tonnes of the steel-making ingredient in 2014 and 764 million in 2015, according to BREE forecasts. China, which buys about two-thirds of seaborne cargoes, will import 869 million tonnes this year and 927 million tonnes in 2015. But iron ore prices are likely to fall, with BREE forecasting USD 97 a tonne in 2015, down from USD105 this year. With the spot price .IO62-CNI=SI at USD 94.90 on June 27, and more mine supply expected in Australia and number two exporter Brazil, the risk is that prices will be weaker than BREE expects.