What does China’s possible lifting of ban on Australian coal mean for prices, supply?
A potential lifting of China's sanctions on the import of Australian metallurgical coal and China's post-Covid-19 recovery will be key factors to watch in 2023, market sources told Fastmarkets on Wednesday January 4
Australian foreign minister Penny Wong’s visit to Beijing in December 2022, as well as new adjustments to import duties on metallurgical coal announced in the same month, have ignited hopes of thawing tensions between the major trading partners after three years.
“This is a very rapid development, and will likely lead to more Australian coal being allowed into China,” a trader source in Singapore told Fastmarkets.
More Australian coal entering China will cause a major supply swing and disrupt trade flows again, sources said.
There was market chatter on Wednesday that China’s National Development and Reform Commission had held a meeting a day earlier to discuss the lifting of the ban on the import of Australian coal, which was first imposed in October 2020.
Several major companies were said to have attended the meeting, including a major Chinese steelmaker, and there was an expectation among market sources that those in attendance would likely receive preferential treatment and be able to import Australian coal ahead of others.
At least one of the meeting attendees confirmed that the ban on Australian coal will be lifted, but did not specify when and how, a coking coal trader in Beijing told Fastmarkets.
It is possible that the lifting of the ban will start from thermal coal
“It is possible that the lifting of the ban will start from thermal coal,” a source based in Australia said, adding that the major Chinese steelmaker had denied having attended the meeting.
China’s love for prime low-vol coal
Australian prime low-vol (PLV) hard coking coal is highly sought after in China, especially to blend with local high-ash, high-sulphur coals, as well as with other blending coals imported from Russia and Indonesia.
China imported 72.27 million tonnes of coking coal in 2020, with 34.97 tonnes sourced from Australia. China’s 2019 imports followed a similar trend, with total imports reaching 74.49 million tonnes and 30.77 million tonnes imported from Australia, according to Chinese customs data.
“Good demand for Australian PLV, however, may not have much impact on the ample supply of Mongolian and Russian coals, which should continue to flow into China at stable or higher quantities,” a second trader source in Singapore told Fastmarkets.
This is because China’s scrapping of Covid-19 nucleic tests and removal of quarantine periods will see logistical chokepoints in China easing after the current wave of Covid-19 infections, causing Mongolian and Russian imports to pick up pace.
The number of trucks crossing from Mongolia into China through the major Ganqimaodu border increased in December, data shared by sources to Fastmarkets shows.
It averaged 824 vehicles in the first 23 days of December, which is an increase of 7.71% from November, and a sevenfold increase from the same period last year.
Impact on prices
There have been mixed views on how the lifting of sanctions will affect prices if it really happens, especially after the recent revision of coal import duties in China.
“The revised import duties are good for buyers because there will be more supply of Russian coal available for the rest of the world, which means some coke refineries can be more competitive,” a buyer source for a major Chinese steelmaker told Fastmarkets.
It also means that the cost savings can be transferred to Australian coals, an Australian seller source told Fastmarkets.
“For example, Indian buyers will have more cash on hand to pay for prime hard mid-volatility coal,” the Australian seller source told Fastmarkets.
“The higher supply of Australian coal may pressure spot prices. China will also reduce its demand for coke,” the first trader source in Singapore said.
Chinese domestic coking coal prices will be under pressure once Australian coking coal enters China, and this will be beneficial for mills, which have been suffered from high coking coal costs, a Beijing-based trading source said.
But a trading source in India said last week that premium hard-coking coal prices may increase once China re-enters the market.
“Moreover, the price spread between low-volatility and mid-volatility coals may widen by up to $5 per tonne or more once China starts importing Australian coking coal as Chinese mills prefer PLV,” a source at a major mill in India said.
Australian sellers also have an optimistic view.
Australian prime hard coking coal is still highly-sought after in China
“Australian prime hard coking coal is still highly-sought after in China. There is zero availability for certain brands now, even without Chinese demand, and order books are filled well into the first quarter, so I feel prices will react sharply strongly to China’s re-opening,” the same Australian seller source said.
“This is especially because there are few alternatives to Australian-sourced low-sulphur, low ash coal available to China,” he added.
Prime high-vol coals will also see tighter supply if China re-opens and starts to import more, a second Australian seller source told Fastmarkets.
“While not primarily used as low-vol coal, high-vol coal can also be used domestically as their low ash and sulphur content are big drivers for Chinese mills. Of course, this still depends on the import arbitrage and coke blend requirements,” the second Australian seller source said.
A seller of United States-origin prime hard coals said while the lifting of the sanctions would be positive for price discovery, the limited supply of prime hard coking coal means that the extra demand from China should support prices.
“It may mean China is less of a market for us, but we view China as opportunistic, and not strategic, so I will simply redirect my volumes elsewhere,” he added.
But prices for pulverized coal injection (PCI) material may not be as influenced by the lifting of the ban.
“There is sufficient domestic supply of PCI, as well as coal sourced from Russia and Poland. Chinese steelmakers tend to want to stick with their domestic suppliers than take their chances in the seaborne markets, so there will be less support for Australian PCI except for possibly certain brands which had found their way there in the past,” the first Australian seller source told Fastmarkets.