China’s crackdown on Australian coking coal hurts its steel industry

Chinese authorities have now more or less confirmed what the market already knew, namely that they have placed what amounts to severe curbs on imports from Australia, the world’s largest exporter of coking coal used to make steel, and the second-biggest shipper of thermal coal used in power plants.

A Chinese foreign ministry spokesman indicated on Wednesday that “many” Australian coal shipments have “failed to meet environmental standards”.

It would be a challenge to find anybody in the coal industry who believes environmental standards are the real reason for China placing an effective ban on coal imports from Australia, but at least the spokesman has circuitously confirmed that the restrictions are indeed in place.

Since the unofficial ban was enacted in October, shipments from Australia have plunged, with Chinese imports of coking coal from Australia falling to 1.53 million tonnes in October, or about 26% of its total imports of the fuel.

That compared to a share of 30% in September and 78% in March, the highest level since at least 2018, according to Reuters’ calculations based on data customs data.

The situation for November looks even direr, with only seven cargoes from Australia, totaling 744,000 tonnes, being discharged at Chinese ports by Nov. 25, according to vessel-tracking and port data compiled by Refinitiv.

Of these, four are likely coking coal, with the remaining three being thermal cargoes.

However, the data also shows that 69 ships carrying a total of 6.84 million tonnes of Australian coal are now waiting to discharge at Chinese ports, with 34 vessels having arrived in Chinese waters this month.

The spat with China is now showing up in Australian coal exports, which were estimated at just 18.4 million tonnes in the first 25 days of November, down from 27.98 million in October, and well below the best month so far in 2020, which saw 32.7 million tonnes exported in June.

Prices diverge

The Chinese restrictions have hit the price of Australian coking coal, with contracts on the Singapore Exchange ending at $101.57 a tonne on Wednesday, the weakest since July 2016 and down some 27% from the recent peak on Oct. 5, and some 37.3% below the high so far this year, reached in early March.

While Australian coking coal prices have been plunging, the opposite is true for their Chinese equivalent, the Dalian Commodity Exchange contract, which ended at 1,391.5 yuan ($211.80) a tonne on Wednesday.

The contract is up 13.5% from late September and is also some 38.5% above the low for the year so far, reached at the end of April while much of China’s economy was still locked down as part of efforts to combat the coronavirus pandemic.

Australia dominates the global seaborne coking coal market, with the only meaningful competitors being the United States and Canada.

The price for U.S. coking coal at Hampton Roads port in Virginia, as assessed by commodity price reporting agency Argus, ended at $120 a tonne on Wednesday, up 12.1% from its recent low of $107 on Oct. 27.

Traders report that there is increased Chinese interest in buying U.S. coking coal in the first quarter of next year, and substantial premiums are being offered to secure cargoes.

What does appear certain is that Beijing’s spat with Canberra is likely to translate into higher costs for China’s vast steel sector.

While China, the world’s biggest producer and consumer of steel, may be able to replace Australian coking coal with a combination of higher domestic output and increased imports from neighbouring Mongolia, as well as from the United States, Canada and Russia, it will come at a price.

At the same time China’s regional competitors in the steel market, such as Japan, South Korea and India, will enjoy the windfall of cheaper Australian supplies.

While there is limited competition among these nations for steel exports to other countries in Asia, it’s also fair to say that China’s steel mills will see margins contract, especially since iron ore costs have been rising as well.

(Editing by Himani Sarkar)