In the first six months of 2020, Australia was the largest supplier to China of coking (or metallurgical) coal — but it looks like those days are over.
Although the news headlines out of Asia overnight focused on the coal needed for steelmaking, it seems the Chinese move will also affect our thermal coal exporters.
China has told some of its state-owned steelmakers and coal-fired power plants to stop importing Australian coal with immediate effect.
Among the utilities given instructions to look elsewhere for thermal coal are Huaneng Power International, Datang International Power Generation and Zhejiang Electric Power.
Reports out of Hong Kong this morning said some 7 million tonnes of Australian coking coal is sitting on bulk carriers now waiting on China’s coast.
“There are several vessels carrying Australian coal waiting at Chinese ports for more than a month now,” S&P Global Platts analyst Deepak Kannan told the South China Morning Post.
Other reports state the ports have been instructed not to unload Australian coal cargoes.
London-based commodity news service Argus Media reports that US miners and traders have noted more enquiries for American coking coal.
Argus said 4Mt of coking coal in 61 vessels are waiting to be allowed to unload at just two northern Chinese ports, Jingtang and Caofeidian.
This is politics — but not entirely
Some sources suggest other factors may have played into China finding another way of punishing Australia for standing up to Beijing on a number of issues, including demanding an enquiry into the origin of the COVID-19 pandemic, access to the South China Sea, the independence of Taiwan and cracking down on Beijing-linked operations within Australia.
China is making efforts to reduce pollution and, more importantly, is reportedly pushing the coal mining industry to consolidate and enlarge so that it can reduce its reliance on imports.
And coking coal is a more suitable weapon in the hands of Beijing: China still remains heavily reliant on Australia for iron ore but has far more options when it comes to sources of coking coal.
It must be noted that Beijing has not, as far as we can tell, issued similar instructions to cease buying coking coal from any other country.
Reports out of Hong Kong state the ban on Australian coal is likely to remain “indefinitely”.
Chinese mills will now shun Australian coal
It is unlikely that any written directives have been made as this would allow Australia to take the issue to the World Trade Organisation.
Argus said a “major” northeast China state-owned steel mill was given verbal instructions over the weekend, and others are being told over the following days.
A Shanghai trader pointed out that, while some mills have yet to receive instructions, the word has got around and all steelmakers are now likely to shun Australian coal “whether or not the ban is real”.
On Monday, just before the news broke across the mainstream media, Commonwealth Bank commodity analyst Vivek Dhar sent out a note predicting Australia’s coal exports to China would keep dropping for the remainder of 2020.
He noted this is not the first time China has used coal as a weapon against Australia: on 18 May five state-owned power companies were instructed by the National and Development Reform Commission not to buy Australian thermal coal.
While Mr Dhar agrees the move is political, he said it is also reflective of domestic Chinese policies.
“China’s overall coal import restrictions have been a persistent theme this year, as well as through the back half of 2019, as authorities look to boost self-sufficiency and provide support for China’s coal sector,” he said.
Prices to fall — but spike with La Nina
Chinese policy makers are reportedly targeting total coal imports — both coking and thermal — of 270Mt in 2020, down around 10% from 300Mt in 2019.
Mr Dhar noted that in August, China accounted for 23% of Australia’s thermal coal exports and 28% of coking coal shipments.
Both types of coal now face downside risks.
In another note on Tuesday, Mr Dhar said coking coal exports are also at risk from La Nina, with expected flooding and cyclones in Queensland.
But this will at least result in higher prices.
“With about half the world’s coking coal exports concentrated in the Bowen Basin, any extended disruption to coal and rail infrastructure in the region will likely result in coking prices spiking,” Mr Dhar said.