China may back down on coal crackdown

Steel bars being cut in Jiangsu province. Picture: Reuters

China’s ban on Australian coal could be about to crack after months of rising prices and a severe northern winter have combined to pressure the restrictions.

Daniel Hynes, senior commodities analyst at ANZ, this week raised the possibility in a note suggesting “traders are reassessing the market amid reports that China is considering allowing some stranded Australian coal shipments to be unloaded”.

Australian coal exporters have been frustrated by the stand off as China informally banned Australian coal late last year.

Ironically, in singling out Australian coal, China disturbed the global market at a time when the international economy was showing signs of recovery.

On top of that, a severe winter increased China’s coal demand. By early January this year it was clear the move had backfired.

Both steel making (coking) and heating (thermal) coal prices have moved higher in recent weeks with a 25 per cent lift in steel making coal since Christmas.

Moreover, Australia has rapidly managed to find alternative new markets for its coal with China’s boycott compensated by rising exports to Japan, South Korea and Thailand.

Overall, Australian coal exports in December were up 9 per cent year on year.

There have also been unconfirmed reports that Australian coal is getting into China through roundabout routes - initially going to another country and then being re-exported to China.

The back channels were noted by Whitehaven Coal, the nation’s biggest listed coal producer, in a recent production report that said: “China’s restrictions have altered seaborne coal trade flows where, instead of being delivered to China, Australian coal is now finding customers in alternate destinations including India, Pakistan and the Middle East, and traded coal historically delivered into these markets is finding its way into China.”

Analysts are divided over the quantity of Australian coal that is getting around the ban and “finding its way into China”.

It is most likely only a fraction of the $14bn sector that is the nation’s second-biggest export after iron ore.

With dozens of ships stranded on the China coast in a queue that has lasted for months, any move by China to end the stalemate and let the coal cargo come into China mainland ports will be seen as a major development.

China’s trade tensions with Australia peaked with the informal coal ban that followed bans on a range of products including barley, beef and wine.

Australian coal share prices were boosted by the higher volumes and prices seen over December, though they have largely drifted in recent weeks.

Meanwhile, the long-term outlook for coal is very poor as environmental concerns continue to restrict investment in relation to the commodity.

The prospect of a better trading relationship with China will be welcomed by the coal sector which had been holding crisis meetings over the summer holiday season in search of a breakthrough on the coal ban.

Leading shipowners had also been threatening legal action against Chinese buyers amid the stoush while there were also concerns for the crews of the ships left stranded.

Separately, there have been concerns also about the technical conditions of ships that had not been moved for some time, along with the potential deterioration of the quality of the coal on board.

Inside China there are reports that lower quality coal has been used to supplement the lack of high quality coal from Australia.

In turn this has led to reports on lower quality steel output.