Here’s why miners shouldn’t be too worried about China’s ‘ban’ on Aussie coal

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Reports China is banning the import of Australian coal is not good news for our coal miners, but there is assurance that a long-term ban is unlikely.

News was widespread this morning that North China’s largest port, the Port of Dalian, had banned Australian coal imports indefinitely and placed a 12 million tonne cap on all other international imports.

It made for some mixed results for miners on the ASX at the open today — half were up, half were down:

It follows weeks of long delays at customs for Australian coal trying to make its way into China.

At this stage it is just speculation, based on comments by an “official from the Dalian Port Group” made to Reuters.

The Australian government is working to confirm the reports.

Treasurer Josh Frydenberg has poured cold water on suggestions it is a retaliation by China over Canberra’s ban on tech company Huawei participating in the 5G network, the AFR reported this morning.

Mr Frydenberg said Australia had a “very strong relationship with China” and the country’s “exports with China will continue to be strong as they have been in the past”.

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Wood Mackenzie estimates China’s seaborne metallurgical coal imports will reduce by 3 million tonnes this year as a result of the import ban.

However, senior consultant Yu Zhai said the high quality of seaborne coal, and difficulties securing alternative coals domestically, should insulate coal exporters from much deeper cuts, despite strong signals from China.

“Australia would account for most of the volume reduction as it represented over 75 per cent of China’s seaborne metallurgical imports in 2018,” he said.

Australia exported around 36 million tonnes of metallurgical to China last year, which accounts for 20 per cent of Australia’s total exports.

Meanwhile, Wood Mackenzie estimates China’s seaborne thermal coal imports will drop by 15 million tonnes in 2019, taking into account the risk of wider coal import restriction.

Australia again could also be most affected by that reduction, Mr Yu said.

RBC Capital Markets’ London-based mining analyst Tyler Broda said China is one of the world’s largest importers of thermal coal.

But he noted that generally the Australian thermal coal produced by Glencore and BHP (ASX:BHP) is of a higher average quality and larger proportions are shipped to Japan and South Korea.

“This coal will now need to find other markets, and we would anticipate will have a negative impact on seaborne prices as a whole,” Mr Broda said.

The impact on coking coal would be “more nuanced”, according to Mr Broda, because although there are lower net Chinese imports as a percentage of the entire seaborne market, China has generally required higher-quality met coals from Australia for its steel productions.

Metallurgical, or met, coal is a low-ash, low-sulphur and low-phosphorus coal that can be used to produce high-grade coking coal – an essential part of the steelmaking process.

“Increased tonnes in the seaborne market (and the implicit pick-up in Chinese production) should also see prices pull back, however at $180/t versus spot $205/t there is more buffer from a potential price impact versus our forecasts,” he said.

Shining light

It’s not all bad though. Wood Mackenzie’s Mr Yu says the possibility of adverse impacts on China suggest a long-term ban is unlikely.

His reasoning is that it would send Chinese domestic prices higher and a longer term ban would force Chinese coastal mills to amend their coke blends.

Additionally, while China could source coal from Mongolia to replace the Australian imports, Mongolia’s coal is weaker, meaning replacements would be limited in the short-term.

Despite this news, the majority of shares were unchanged in early trading.

Small cap producer Stanmore Coal (ASX:SMR) says the “significant majority” of its long-term contracted sales are to customers in Japan and Korea.

“Stanmore has limited exposure to China through spot sales, which are also made to customers in a range of other countries,” the miner told investors this morning.

“Stanmore will continue to monitor the situation to determine whether there will be any impact on the company’s coal sales.”

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