Bulk Buys: China's return to Australian coal market to be a slow moving beast

Chinese companies are starting to make bids for Australian coal cargoes after an unofficial ban that ran for over two years
But Coronado CFO Gerhard Ziems says Australian coking coal exports to China will only touch half of pre-pandemic levels in 2023
Met coal prices have cut their discount to thermal significantly in the wake of China’s reopening

Chinese coking coal purchases out of Australia will total more than their pre-pandemic levels, one of our top coal marketers says.

It signals a slow reconciliation for a market previously described by BHP (ASX:BHP) chief economist Huw McKay as the sun around which the solar system of the seaborne met coal trade orbited.

While China opened itself to Australian coal again at the start of 2023, supply shortages and dramatic shifts in market dynamics mean it will take a long time for those trade flows to return to normality, if they ever do.

On a broader geopolitical level it remains to be seen if the olive branches between China and the Albanese Australian Government will amount to a total thawing of the frosty relations between the trading partners.

Coronado Global Resources (ASX:CRN), one of the few Aussie companies still selling met coal into China during the pandemic thanks to its Buchanan mine in the United States, thinks the trade will take a long time to recover, even as its return boosts confidence in the market.

CFO and marketing chief Gerhard Ziems thinks the Australian met coal trade to China, previously around 40Mt (with another 40Mt of thermal), will amount to around 20Mt in 2023.

It comes with contracted tonnes locked up with Asian and European steelmakers desperate to replace Russian supplies, while wet weather which torched Australian production volumes in 2022 means there is a dearth of supplies on the spot market.

“China will rely totally on spot tonnes that are available or not available in the market. So, last year 2022, we didn’t have a lot of spot tonnes available simply because of the weather events in Australia,” Ziems told analysts on a conference call yesterday.

“Hopefully that improves in 2023, but even then, China will rely on spot tonnes, so I think it will be a slow ramp up.”

Going back in time

Another factor is the rise of Russian supply, locked out of Europe, into the Chinese market.

That means PCI and semi-soft coking coal sales, commonly traded Russian products, are not likely to go from the Australian market into China according to Ziems.

“If you go back in history, China used to import about 80 million tonnes out of Australia of coal, 50-50 thermal and met coal. So let’s say 40 million tonnes of met coal. Of that 40 million tonnes, 3-7 million tons of Semi and PCI,” he said.

“So we talk about hard coking coal 33 million tonnes … hard coking coal. So you can already say the semi-soft and PCI don’t come back into China out of Australia, because Chinese steel makers can procure that at a significant discount out of Russia.

“So then you work back from the 33 million tonnes, I guess, at best this year 2023 China imports maybe up to 20 million tonnes of hard coking coal out of Australia.”

The price signal from the return of China to the met coal market may be the most important part of the deal for Aussie producers. In short, more customers means more demand and competition for spot tonnes.

China’s steel sentiment has also driven bullishness in ferrous products in recent weeks.

Met coal prices surged to records of around ~US$670/t after Russia’s invasion of Ukraine, but fell below thermal coal prices and at one point last year traded beneath US$200/t as recessionary fears saw steel profits and output fall both in China and across the globe.

But China’s reopening from Covid and support for its property market has reinvigorated both met coal and iron ore demand.

Met coal futures were trading at US$336/t yesterday, just US$15 shy of thermal coal. That situation threatens to end the extraordinary arbitrage that saw Newcastle grade energy coal, normally a discount to coking products, carry a premium to premium hard coking coal in excess of US$150/t at one point last year.

Coal miners mint cash, government intervention be damned

According to Ziems, Coronado has received inquiries from Chinese steel mills already, including those outside the officially approved producers who received the green light from China’s state planning authority to buy Aussie coal a couple weeks ago.

However, contracts which run up to March will restrict trade even after Chinese New Year.

Not that Coronado really needs China buying its Curragh coal to turn a profit.

Coronado raked in US$3.572 billion in revenue in 2022, up 66.2% on 2021, with US$335 million in the bank and net cash of US$92m, even after paying US$700m in dividends and spending US$185m on capex.

Wet weather and inflation saw higher than normal costs of US$88.4/t, in line with other major coal producers on the east coast, with saleable production down 7.2% to 16Mt for 2022.

Blackwater, the town closest to Curragh, saw 792mm of rain, 200mm above 2021 levels.

But realised prices more than made up for any operational issues, with met coal sales averaging US$265.8/t across 2022, up 92.6% on FY21 realisations.

With the arbitrage between thermal and met coal prices, CRN saw its highest penetration of thermal in its sales mix at 26.7% in the three months to December 31, up 6.3% on the September quarter and far above the 18.6% seen across 2021. Many intermediate grades of coal can be traded into either the semi-soft or energy market.

It wasn’t the only Queensland coal miner to produce stellar results, with Stanmore (ASX:SMR) finishing the year with US$433m in cash despite making over US$500m of debt repayments and acquisition splashes in the December quarter.

Stanmore paid US$110m in a divided to Mitsui and another US$270m as part of its purchase of the Japanese trading house’s 20% stake in the SMC JV.

It also paid US$100m to BHP as a deferred payment for the original US$1.3b acquisition of the first 80% of the South Walker Creek and Poitrel mines, along with US$120m and US$44m repayments on separate credit facilities.

SMR has a net debt position of US$182m (total debt US$615m) ahead of a cash sweep due in the March quarter.

SMR produced 4.4Mt of ROM coal with saleable production of 3.1Mt and total sales of 3.4Mt, and says costs are expected to be within guidance.

“Saleable production from the quarter remained strong notwithstanding unseasonal wet weather experienced and annual CHPP shutdowns for maintenance purposes across all three sites including the capacity upgrade at Isaac Plains. Sales of produced coal strengthened during the quarter due to carry-overs from Q3 and to take advantage of infrastructure opportunities,” CEO Marcelo Matos said.

“All sites ended the year with healthy levels of product and ROM stockpiles which should support 2023 performance.

“The metallurgical coal market has recently strengthened on expectation of easing import restrictions into China and supply tightness.”

Strong results from coal miners have come amid growing criticism from the industry on State and Federal Government intervention, including energy price caps last year from Canberra, a massive royalty increase from the Queensland Government and moves to expand domestic coal reservation by the NSW Government.

Despite complaints from miners, analysts tend to be sceptical that moves like these will have a big impact on their earnings. Whitehaven Coal (ASX:WHC) MD Paul Flynn complained about being blindsided by the expansion of the reservation scheme to include miners that didn’t supply NSW power plants like Whitehaven’s.

The deal would see miners paid at a $125/t limit for coal supplied to the State’s generators, lower than some miners’ current cost base.

But it will only apply to uncontracted tonnes, something Goldman Sachs’ Paul Young, Hugo Nicolaci and Caleb Heiner think will shield Whitehaven from the impact of the proposal.

“We note also that WHC has been brought into the NSW coal reservation scheme, in which the government is seeking an additional ~4Mt of annualised thermal coal for NSW power generators,” they said in a client note.

“More clarity is being sought from the government, however given the scheme will be for only unallocated tonnes and given WHC is largely contracted we expect very little impact, particularly as prices begin to fall into shoulder season from April onwards.”

Goldman expects thermal prices to fall from spot levels to around US$220/t by the fourth quarter as demand drops from the northern hemisphere’s transition to summer.

ASX coal stocks

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CODE	COMPANY	PRICE	1 WEEK RETURN %	1 MONTH RETURN %	6 MONTH RETURN %	1 YEAR RETURN %	MARKET CAP
NAE	New Age Exploration	0.009	13%	13%	29%	-40%	$ 11,487,191.28
CKA	Cokal Ltd	0.205	0%	-5%	32%	32%	$ 197,704,285.80
NCZ	New Century Resource	0.895	5%	1%	-43%	-61%	$ 110,588,652.72
BCB	Bowen Coal Limited	0.325	18%	7%	14%	97%	$ 559,631,338.03
SVG	Savannah Goldfields	0.16	-11%	-11%	-20%	-30%	$ 27,615,750.08
GRX	Greenx Metals Ltd	0.75	-6%	26%	213%	173%	$ 190,215,348.00
AKM	Aspire Mining Ltd	0.067	-4%	0%	-28%	-22%	$ 33,504,041.01
AVM	Advance Metals Ltd	0.012	0%	33%	9%	-29%	$ 6,960,528.83
AHQ	Allegiance Coal Ltd	0.04	-5%	-2%	-59%	-91%	$ 39,190,941.23
YAL	Yancoal Aust Ltd	6.75	11%	7%	19%	142%	$ 8,899,761,805.38
NHC	New Hope Corporation	6.65	4%	2%	55%	194%	$ 5,867,092,022.05
TIG	Tigers Realm Coal	0.015	-12%	-6%	-6%	-25%	$ 209,067,237.89
SMR	Stanmore Resources	3.54	5%	19%	81%	222%	$ 3,082,725,407.16
WHC	Whitehaven Coal	9.17	5%	-13%	49%	246%	$ 8,314,507,705.35
BRL	Bathurst Res Ltd.	0.84	2%	-3%	-21%	5%	$ 162,655,813.00
CRN	Coronado Global Res	2.1	2%	2%	59%	80%	$ 3,587,610,982.20
JAL	Jameson Resources	0.095	6%	-2%	36%	23%	$ 37,193,554.50
TER	Terracom Ltd	0.94	-1%	-4%	18%	395%	$ 800,966,235.00
ATU	Atrum Coal Ltd	0.007	0%	17%	20%	-68%	$ 9,741,894.20
MCM	Mc Mining Ltd	0.35	-7%	52%	253%	364%	$ 139,188,556.15
DBI	Dalrymple Bay	2.51	2%	3%	26%	26%	$ 1,244,361,784.17

Arrow Minerals surges as investors get excited about Simandou

Simandou looks like it could be on its way, with reports rising that infrastructure to enable the massive high grade iron ore project is being developed at pace.

One of the companies involved is Rio Tinto (ASX:RIO), the head of one of two consortiums who each own blocks of the massive high grade iron ore development, which contains an estimated 3.8Bt of iron ore resources at grades of over 65% Fe.

Analysts have suggested Simandou could bring anywhere between 60-200Mt of iron ore into the seaborne market.

Could this chill prices for Aussie miners, which are booming again after China’s reopening?

That remains to be seen, though with costs in the high teens or low 20s, the market will need to drop some way before Aussie producers like BHP, FMG or Rio are unprofitable.

More likely the Simandou ore, which some experts say is not suitable for direct reduced iron steelmaking, will be a blending ore for Australian material.

Arrow Minerals (ASX:AMD) surged after its boss Hugh Bresser, a former BHP executive, made comments to that effect in the AFR, attracting a price and volume query from the ASX.

Arrow ran hard yesterday. It owns the Simandou North project in Guinea, where it believes the infrastructure being built by Rio and its Chinese partners could open up the opportunity to develop its own project in the future.

Rio and partners like China’s largest steelmaker Baowu, also a major investor in Australian iron ore mines, need to build a railway line connecting the remote Simandou ranges to a new port at Morebaya.

Arrow pointed to its progress on Simandou North and media coverage after being handed a little speeding ticket. It finished the day up 50%.

ASX iron ore stocks

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CODE	COMPANY	PRICE	1 WEEK RETURN %	1 MONTH RETURN %	6 MONTH RETURN %	1 YEAR RETURN %	MARKET CAP
ACS	Accent Resources NL	0.025	0%	0%	-46%	-54%	$ 11,650,682.08
ADY	Admiralty Resources.	0.007	0%	17%	-13%	-42%	$ 9,125,054.07
AKO	Akora Resources	0.17	3%	0%	3%	-26%	$ 11,911,384.65
BCK	Brockman Mining Ltd	0.023	5%	0%	-36%	-51%	$ 213,445,339.01
BHP	BHP Group Limited	49.71	1%	8%	35%	22%	$ 250,251,535,466.40
CIA	Champion Iron Ltd	7.82	7%	7%	58%	31%	$ 4,028,934,451.54
CZR	CZR Resources Ltd	0.24	4%	9%	-15%	81%	$ 56,077,632.00
DRE	Dreadnought Resources Ltd	0.098	1%	2%	92%	151%	$ 290,434,452.68
EFE	Eastern Resources	0.0165	-8%	-41%	-39%	-75%	$ 18,805,217.44
CUF	Cufe Ltd	0.024	33%	71%	26%	-33%	$ 22,220,584.40
FEX	Fenix Resources Ltd	0.255	0%	9%	-12%	13%	$ 146,040,480.00
FMG	Fortescue Metals Grp	22.51	2%	9%	26%	10%	$ 68,907,234,864.84
FMS	Flinders Mines Ltd	0.52	16%	37%	3%	0%	$ 87,801,260.04
GEN	Genmin	0.2	3%	0%	-15%	-5%	$ 64,557,570.00
GRR	Grange Resources.	1.025	8%	24%	-21%	36%	$ 1,192,058,858.94
GWR	GWR Group Ltd	0.059	-6%	-5%	-40%	-67%	$ 19,272,999.30
HAV	Havilah Resources	0.385	7%	24%	60%	120%	$ 118,739,703.75
HAW	Hawthorn Resources	0.1	-9%	-15%	19%	2%	$ 35,176,639.37
HIO	Hawsons Iron Ltd	0.097	2%	17%	-77%	-54%	$ 81,272,684.70
IRD	Iron Road Ltd	0.12	4%	-11%	-14%	-35%	$ 92,279,019.90
JNO	Juno	0.105	5%	13%	-25%	-16%	$ 15,600,670.12
LCY	Legacy Iron Ore	0.017	-6%	-6%	-15%	-19%	$ 108,916,045.38
MAG	Magmatic Resrce Ltd	0.11	15%	29%	53%	15%	$ 36,683,135.76
MDX	Mindax Limited	0.059	0%	0%	0%	48%	$ 115,533,663.12
MGT	Magnetite Mines	0.495	-3%	-21%	-59%	-71%	$ 37,160,722.41
MGU	Magnum Mining & Exp	0.027	4%	35%	-33%	-67%	$ 18,761,718.66
MGX	Mount Gibson Iron	0.69	9%	42%	41%	66%	$ 813,660,953.11
MIN	Mineral Resources.	96.28	10%	21%	106%	56%	$ 17,355,408,435.00
MIO	Macarthur Minerals	0.14	-7%	4%	-13%	-60%	$ 23,191,488.32
PFE	Panteraminerals	0.145	0%	26%	0%	-22%	$ 7,467,662.40
PLG	Pearlgullironlimited	0.03	0%	-3%	-20%	-51%	$ 2,110,569.24
RHI	Red Hill Minerals	4.6	7%	8%	39%	61%	$ 299,992,300.30
RIO	Rio Tinto Limited	127.44	6%	10%	32%	18%	$ 46,914,305,125.32
RLC	Reedy Lagoon Corp.	0.01	0%	0%	-47%	-74%	$ 5,667,196.01
CTN	Catalina Resources	0.009	6%	0%	0%	-18%	$ 11,146,382.03
SRK	Strike Resources	0.089	5%	5%	-26%	-29%	$ 24,402,500.00
SRN	Surefire Rescs NL	0.015	0%	25%	-29%	25%	$ 23,720,452.16
TI1	Tombador Iron	0.028	0%	12%	27%	-30%	$ 59,835,506.44
TLM	Talisman Mining	0.17	0%	26%	13%	0%	$ 30,977,017.01
VMS	Venture Minerals	0.028	4%	22%	-7%	-35%	$ 49,467,812.58
EQN	Equinoxresources	0.13	-4%	0%	0%	-45%	$ 5,850,000.13
AMD	Arrow Minerals	0.009	80%	125%	125%	50%	$ 15,202,590.56