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Petrotahlil - Military clashes between India and China are threatening to create a sharp deterioration in bilateral relations with the potential to affect commodity trade and worsen regional security.

The Indian and Chinese armies fought running battles earlier this week in the Ladakh region on the two countries' Himalayan border, leaving 20 Indian soldiers dead and an unknown number of casualties on the Chinese side. Beijing and Delhi have long-standing border disputes in the remote region but the latest violence is the worst for at least 50 years.

The conflict has sparked calls in India for boycotts of Chinese products, raising the prospect of a deterioration in trade relations. India and China are among the biggest drivers of global oil and raw materials demand. But direct commodity trade is relatively limited, offsetting the impact of any curbs that may be imposed.

Iron ore is one of the most significant commodity products traded between the two. India was the fourth-largest supplier of iron ore to China last year, shipping just under 24mn t, mostly in pellet form. This was just 2pc of total Chinese imports. But China is already facing doubts over the security of shipments from its two dominant iron ore suppliers — because of the impact of the Covid-19 outbreak on exports from Brazil and trade tensions with Australia — leaving imports unusually vulnerable to political disruptions.

China is also a regular importer of Indian chrome products, taking just under 383,000t of ferro-chrome from India last year, or 12.5pc of total imports. But India's share of Chinese imports has been falling and the chrome market is well supplied, as Covid-19 lockdowns are lifted in major producer South Africa.

India imports significant quantities of Chinese fertilizers, including urea and DAP. The country has over 145mn farmers, making it one of the world's largest fertilizer consumers. Fertilizer provision is consequently a major political issue, so any moves to limit Chinese supplies — particularly during the current period of rising domestic fertilizer sales — seem unlikely, barring any significant escalation in tensions.

Oil and petrochemical trade is more limited. Chinese refiners started increasing gasoline sales to India last year, with exports hitting a two-year high of 28,000 b/d in November, after state-controlled PetroChina signed a term deal to supply Indian state-controlled refiner Hindustan Petroleum earlier in the year. But shipments have eased since then, while India's nationwide coronavirus lockdown has slashed import demand.

Petrochemical products tend to move in the other direction. Indian polymers are exported by land to Nepal and the Ladakh region, one of the disputed border areas close to the latest fighting. India ships some bulk chemicals to China, typically from its west coast ports, while some aromatics products are also traded although quantities are limited. Indian polyethylene and polypropylene are regularly exported to China, which Indian producers see as an important export destination. But there is no sign of any disruptions to trade following this week's military clashes, petrochemical market participants said.

Tensions ease

Tensions have eased slightly since the clashes took place on 15 June. China's official media has played down the incident, while the foreign ministry said the two sides have agreed to de-escalate as soon as possible. Reactions have been more heated in India, with prime minister Narendra Modi pledging to give an "appropriate answer" to China and referring to the dead soldiers as martyrs. But India's struggles to contain one of the world's worst coronavirus outbreaks, and its military limitations compared with China, may limit its options for retaliation.

The clashes in Ladakh are only the latest, and most deadly, episode in a trend of rising tensions between the two countries. China has strengthened its backing of India's traditional rival Pakistan and has been expanding its influence in Nepal and Sri Lanka — countries that have long been part of India's orbit. China's Belt and Road initiative is seen by some Indian politicians and analysts as an attempt to extend Beijing's influence on India's borders and limit its own security.

The Himalayan incident follows a series of what appear to be increasingly assertive moves by Beijing in the region, including expansions in the South China Sea, a harder line on protest movements in Hong Kong and the trade dispute with Australia. A worsening of relations between the world's two most populous nations, coming amid the coronavirus pandemic and a global economic downturn, threatens to complicate an already volatile Asia-Pacific security picture.

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