Australia’s coal exports to China may be hit hard amid tensions
While coal exports from Australia to China could be hit given the souring relations between the two sides, the situation could also present opportunities for the dry bulk market
Should volumes reduce from Australia, China will have to look farther afield for its coal supplies. The US, Russia and South Africa could be options, with higher shipments from Indonesia already emerging
WHILE coal exports from Australia are unlikely to be materially impacted this year from China’s reported ban, volumes in 2021 could be hard hit, according to pricing agency S&P Platts.
It estimates that up to 32m tonnes of thermal coal could be displaced in the first quarter of next year alone.
China could look to Indonesia for some volumes, but since Indonesian coal is of a lower calorific value than Australian coal, supplies from Russia or South Africa may be required, according to the agency’s senior coal analyst Matthew Boyle.
Despite China’s coal import quotas being exhausted at some ports since as early as April, Australia’s coal exports have held up, he said.
“Platts Analytics believes part of any rationale for a potential ban on Australian coal imports by China is not only political, but also due to the year-on-year increase in Australian coal exports to China so far.”
In the first eight months of the year, Australia exported 38.6m tonnes of thermal coal and 31.6m tonnes of metallurgical coal to China, which represents an increase of 4.6m tonnes and 8.5m tonnes, respectively, compared with the same period in 2019.
In August, however, imports from Australia started to slow.
According to Torvald Klaveness, high levels of Chinese imports early on in the year have led to strict enforcement of import quotas.
As a result, the average waiting time for capesizes and panamaxes around the Bohai Rim area carrying Australian coal jumped to more than 70 days, its head of research Peter Lindstrom said. That compares with the 10-day clearing time in a typical year.
Soaring Chinese coal prices coupled with low global prices has created “a very profitable arbitrage opportunity” for imports into China, he pointed out, adding that he believed demand for seaborne coal into China would increase in the coming months, and two scenarios could play out.
Either Beijing could relax import quotas for the rest of the year to bring domestic coal prices down from what it calls “the red zone,” or the widening arbitrage could justify sourcing vessels today, idling them for the rest of the year, and discharging cargo in the new year when import quotas are renewed, he said.
In the short term, Indonesia and Russia are the most likely beneficiaries of higher demand for seaborne thermal coal, Mr Lindstrom said, while in the longer term, more coking coal shipments could potentially emerge from more distant sources such as Canada and the US, which would be a bullish scenario for dry bulk shipping.
China has looked to Australia for most of its coking coal supplies, with volumes also sourced from Mongolia, Russia and Canada, according to Platts. The US has also been a small supplier.
Platts believes that at least for 2020, Australian exports are unlikely to be affected by any ban, as steel mills tend to stick with their preferred quality, despite cheaper domestic alternatives. Thus, they may still tap the seaborne market.
It estimates that China will import 214m tonnes of thermal coal in 2020. Including coking coal, the figure rises to 288m tonnes.
Despite a slowdown in most countries because of the coronavirus, China has been producing steel at ever-higher levels.
The World Steel Association estimates that the Chinese economy is rapidly approaching full normality.
While China’s steel demand is expected to increase by 8% this year, aided by government infrastructure stimulus and a strong property market, the rest of the world is forecast to see a contraction of 13%. Overall, global demand will sink by 2.4% in 2020, rebounding by 4.1% next year, but China’s steel output is forecast to remain flat, the group said in its latest short-term outlook report.
Global miner BHP, which had forecast a contraction in global steel production due to coronavirus, was reported to have received notice from customers about deferring or cancelling cargoes.
Sources also reported that some Australian cargoes were being diverted to India, but one local trader told Lloyd’s List that the country did not have the appetite to absorb all the shipments that would have been diverted from China.