Australia’s Chinese Coal Trade May 2019

Chinese Perspective

      Early in 2019 the Chinese Government delayed or banned imports of Australian coal into the five ports of the Dalian region, north China, and limited coal imports from all sources into Dalian to 12 Mt until the end of 2019 – down from 18 Mt. Only Australian coal imports to other Chinese ports were to be subjected to Customs delays of up to forty days – an increase from twenty to twenty-five days.

      Imports through the port of Dalian amount to 14 Mt per year of which 7 Mt is supplied by Australia. This is equivalent to 1.8% of Australia’s coal exports to China. In total, China bought 28 Mt of coking coal from Australia which equates to some 43% of total exports.

      Vague reasons for the embargo on Australian coal have been provided including that the coal does not meet environmental protection standards. There is also comment that China wishes to protect and encourage its coal mining companies. Chinese traders have also mentioned that this is the first restriction without the provision of a valid reason. The embargo is now causing Chinese importers to approach Russian and Indonesian suppliers to negotiate expanded contracts.

      China is reorganising its domestic coal industry to achieve greater self-sufficiency: this involves the closure of illegal and uneconomic coal mines. There are also tensions within the industry because the annual growth rate since 2015 has been 11% but the underlying demand is falling by 1% a year. Consolidation in the coal industry has resulted in a 9% drop in coal production. The profitability of the industry has improved: it follows that imports from Australia are becoming undesirable. National coal stocks provide a little more than fourteen days worth for thermal and coking coal. If this embargo persists, coking coal supplies may tighten since Australia supplies 80% of China’s requirements. For thermal coal it is only 20%.
(CRU, February 2019, China disrupts Australian coal imports)

      If this embargo persists, it will assist China to become more self-sufficient, but manufactured products will become more expensive due to cost increase by Chinese steel makers. Conversely, Australian coal producers may be forced to find other markets at lower coal prices. Spot prices for Australian coking coal are around $A30/t cheaper than Chinese prices (Orient Futures). The price difference for thermal coal is about the same, but despite this, it is Government policy to promote the domestic industry.

      The CRU estimates Chinese steelmaking profitability has fallen from >20% EBITDA to less than 6%; this is lower than the United States steel makers. The Chinese authorities have made no distinction between coking coal and thermal coal although Dalian imports mainly coking coal. In the near term, domestic coal production will increase, offsetting any shortfall from Australia. With this new arrangement Chinese power prices will rise which puts the Government in a difficult situation as this is inflationary and will have a negative impact on Chinese industries.

Australian Perspective

      There has been a swift response to the measurers announced by China. The Australian dollar fell by 1% and high-energy thermal coal, ex-Newcastle, fell from $A123/t to $A88/t in a short period. Refinitiv, a ship tracking consultancy, indicated exports from Newcastle would fall by 30% from 18Mt to 13Mt (rounded). The delayed coal in transit and on vessels is equivalent to two months of Australian production. (News.com, 18 February 2019)

       The value of forecast production for 2018 is anticipated to be $A25B for thermal coal and $A42B for coking coal. The embargo in the Dalian ports so far only accounts for 0.1% of the Australian economy, compared to the 3.7% of GDP contributed by total coal exports. (Nikkei Asian Review, 13 January, 2019)

      In gross terms, the 2018 Australian export income for its principal commodities are coal $A67B and iron ore $A64B; these will be affected by future Chinese policy. As the world’s largest coal consumer, China is moving away from coal-fired power stations that will put pressure on Australian thermal coal prices which are slated to fall from $A100/t to $A74/t by 2020. There will also be pressure on iron ore prices as China moves away from blast furnaces to electric furnaces as iron ore is replaced by scrap metal. Iron ore prices are projected to fall from $A70/t to $A51/t by 2020. (Nikkei Asian Review, 13 January, 2019)

The End Game

The Chinese Government is deliberately sending a message to the Australian Government. The anatomy of banning or delaying Australian coal imports incorporates several strands:

  • The Chinese Government is promoting the domestic coal industry and is providing an opportunity by restricting Australian imports.
  • No official reason has been given for the ban; the explanation for the action involving the protection of environmental standards is clearly spurious.
  • The Chinese Government is displeased with Australia’s decision on Huawei and 5G, and it is also displeased with Australian actions and rhetoric concerning Western Pacific activities and on innuendo relating to political interference.

The action by the Chinese Government is calculated and deliberate. It could be regarded as ‘a shot across Australia’s bow’.  Chinese foreign and military policy is slow but implacable. This is a nice problem for DFAT.

John Hugh Hill  

lurgashal@westnet.com.au

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