China slows imports of Australian coal
Australian coal miners could be forced to sell ‘distressed’ cargos at a discount as China looks to restrict imports.
Australian coal miners could be forced to sell “distressed” cargos at a discount as China looks to restrict imports of both thermal and coking coal, according to consulting major Wood Mackenzie.
China’s latest crackdown on Australian coal comes amid speculation ongoing trade tensions between Canberra and Beijing are to blame, after Chinese authorities slapped tariffs on Australian barley earlier this year.
WoodMac analyst Rory Simington said China appeared to be looking to restrict coal imports to 2017 levels, with the latest round of restrictions likely to hit Australian coking coal as well as energy coal exporters.
“We understand that the previous bans on utility purchases of Australian coal have been extended to steel mills and the bans for utilities reaffirmed. As of yesterday, almost all major steel mills had been informed of the ban on Australia coal, including coal waiting to offload and sitting on port stockpiles,” he said.
“We believe the Chinese government is trying to restrict overall coal imports to 2017 levels. This would mean around 270 million tonnes of imports of all coal types and sources.”
Both thermal and metallurgical coal prices will take a hit with Australian producers having to find new buyers for their shipments.
“While coking coal prices have not really been impacted to date we expect there will be significant short-term weakness due to distressed cargoes that will be redirected to other markets. For thermal coal, high ash prices are down $US5/t since mid last week and are likely to be pushed back to the distressed levels we saw in the third quarter. Benchmark quality thermal coal prices will also inevitably be impacted,” Mr Simington said.
Confusion over quota levels continues to create ructions in the market with many utilities and steel mills already using up their annual limits.
“For much of this year there has been a complete lack of clarity, even amongst Chinese port authorities, about how much quota is actually still available and when and whether additional quota will be released. This is generating huge uncertainty and consequently since May when import controls were tightened and large utilities instructed not to buy Australian coal, many Chinese buyers switched away from imported thermal coal,” Mr Simington said.
“However at the same time Chinese thermal coal prices have been increasing strongly as concerns about the ability of domestic supply to keep up with strong demand. During September there was an expectation that additional quota would be released and this led to a surge in buying activity for Australian high ash coal – prices increased by $US8/t to $US44/t. However as we understand it, probably due to political tensions this has not eventuated.”
An eventual easing is more likely for metallurgical rather than thermal coal, WoodMac said, given China’s reliance on Australia for the steel-making commodity.
“A relaxation of these import controls is much more likely for coking than thermal coal because Australia supplies over 40 per cent of China’s premium coking coal whereas Australian coal represents less than 2 per cent of China’s thermal coal market.”
Shares in Australian coal exporters were hit hard on Tuesday as speculation grew coal exports had again become the target of Chinese coal bans amid ongoing trade tensions.
Shares in local coal miners tumbled in response to the news, even as the S&P/ASX 200 index rose as much as 1 per cent to a 7-week high of 6195.2.
Despite having little exposure to the Chinese markets, Whitehaven Coal shares were down 4 per cent to 94.5c at midday.
New Hope fell 4.3 per cent to $1.23, Stanmore Coal fell more than 5 per cent to a 2-day low of 74c, while Coronado fell nearly 8 per cent, of 7c, to 82.5c.
Thermal coal import restrictions were last floated by Chinese authorities in May, as China looked to support its domestic mining sector amid tumbling global prices.
Coal industry sources say that, while talk of new import restrictions is rife amongst traders, there has been little sign Chinese buyers are preparing to cancel future shipments and it was difficult to know whether the speculation was simply the result of China’s ports closing on existing import caps after a buying spree when Australian coal was cheap earlier this year.
Macquarie analysts said in a Tuesday note the verbal warning to Chinese importers may have resulted from a rush by privately owned steel mills and power stations to buy Australian coal in September after domestic coal prices rose, widening the cost difference between local and imported product.
“Market feedback is that at least four Chinese steel mills have tried today to divert Australian coking coal cargoes en-route to China – in some cases supply untaken through long-term contracts – to overseas markets,” Macquarie analysts said.
But while coking coal exporters may take a hit from China’s latest move, iron ore bosses say they do not expect to face similar restrictions on their businesses.
Speaking at Kalgoorlie’s annual Diggers and Dealers mining conference today, Fortescue boss Elizabeth Gaines said she believed China’s latest crackdown was aimed at supporting domestic coal mines.
“It has happened in the past when there’s been a ban or a slow-down on coal to protect the domestic industry. It’s a very different dynamic with a much stronger domestic coal industry in China,” she said.
“We haven’t had any feedback from our customers and theres’ ongoing strong demand, steel production rates are up 3.7 per cent to the end of August, that’s getting near the top end of the indicators we had from industry when I was in China in January, they thought still might grow by 2 to 4 per cent. So we are seeing strong ongoing demand for iron ore and the iron ore is being consumed, so inventory levels are staying pretty stable.
“We can’t become complacent about it, but there is a very strong trading relationship that has been built over many decades.”
Mt Gibson Iron chief executive Peter Kerr said his company had seen no signs of political tensions flowing into the iron ore market.
“The fundamentals of coal supply and iron ore supply are quite different, in that in China there is a fair amount of coal available from other sources,” he said.
“But for iron ore, China needs seaborne iron ore. The quantity of iron ore within China itself is not major. China is consuming something like 1.2-1.3bt of iron ore per year, and I think it’s domestic production is around 200-250 at most. The rest has to come from seaborne trade. We’ve got steady offtake partners who then sell into Chinese steel makers. We’ve not had any political issues come back to us in our marketing or sales aspects at all.”
But coal major Glencore has previously said it has little doubt the tensions between Beijing and Canberra have hit its Australian coal business.
In August Glencore boss Ivan Glasenberg said the global mining and trading major was expecting further restrictions on Australian coal products to be imposed by Chinese authorities.
Glencore produces about 85 million tonnes a year of coal from its Australian mines and, speaking after the company delivered its half-year financial results, Mr Glasenberg confirmed trade tensions with China were having an impact.
“It’s not favourable for the coal business. The Chinese, they need iron ore and they’re taking as much iron ore as they want from Australia. However in coal they do, sort of, have alternatives. China produces 3.5 billion tonnes of their own coal. You know, they’re not in a rush that they have to import,” he told reporters.
“They cut Australian thermal coal imports, and even coking coal imports. Vessels are waiting outside in China to be discharged, and definitely, Australia is not front of the queue. Yeah, that is affecting the coal business. I think a large part of the downswing of the coal price in Australia today where it is, is on the back of definitely lower Indian demand on the COVID, but China not accepting and not taking Australian coal is having a negative effect.”
China imported about $9.7bn worth of Australian metallurgical coal last financial year, according to the Department of Industry’s chief economist, with the Chinese market second only to India in importance to Australia’s industry.
Exports to India also took a hit earlier this year as the coronavirus took hold and forced widespread closures in the country’s steel industry.
Trade Minister Simon Birmingham said on Tuesday the federal government had not been able to confirm the reports of coal bans, despite querying the situation with the Chinese government.
“Australia remains an important supplier of energy resources to many countries across our region and we certainly seek to continue to do so in a reliable manner,” he said.
Senator Birmingham said he had sought discussions over trade tensions with his counterparts in China on a number of occasions so far this year, but Chinese authorities had not been receptive to requests for a ministerial meeting.
Treasurer Josh Frydenberg said the nation will work to resolve any issues it has with China.
“There have been, in the past, issues around in relation to coal, and we’ve worked through those,” the Treasurer said.
“And we’ll continue to work through these and in the future there will be other issues and we’ll continue to work through those as well and we’ll do so in a constructive way.”
The latest talk of Chinese trade bans comes as tensions rise in the Queensland state election, where the future of the industry in Australia’s major production centres is a perennial election issue.
