How’s that Aussie coal ban going for China?

Prices of imported premium coking coal in the Middle Kingdom soared to record highs of US$384 per tonne while China looks around every nook and cranny to source the product it once got from our east coast.

Australian premium coking coal from Dalrymple Bay is fetching around US$227/t, which while far below Chinese prices, still sets up previously struggling coal companies like Whitehaven (ASX:WHC), Coronado (ASX:CRN), New Hope (ASX:NHC), and Yancoal (ASX:YAL) for big earnings upgrades in FY22.

According to Fastmarkets, the recent price rise was attributable to supply shortages out of Mongolia, with China also looking now at reactivating some of the domestic production shut down in recent months and weeks over safety concerns.

 

ASX coal stocks

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CODE COMPANY PRICE 1 WEEK RETURN % 1 MONTH RETURN % 6 MONTH RETURN % 1 YEAR RETURN % MARKET CAP
BCB Bowen Coal Limited 0.13 24 96 166 161 $ 141,301,999.13
MCM Mc Mining Ltd 0.125 0 9 -7 40 $ 19,302,444.38
ATU Atrum Coal Ltd 0.045 0 -16 -81 -80 $ 26,842,305.47
TER Terracom Ltd 0.16 0 23 14 19 $ 113,041,144.50
NHC New Hope Corporation 2.01 0 7 53 58 $ 1,648,067,022.36
AKM Aspire Mining Ltd 0.075 0 6 -29 -9 $ 41,118,595.79
LNY Laneway Res Ltd 0.005 0 0 -9 -38 $ 19,520,329.67
WHC Whitehaven Coal 2.25 -2 0 40 76 $ 2,344,102,406.64
SMR Stanmore Resources 0.71 -2 -1 -8 4 $ 196,044,597.23
PDZ Prairie Mining Ltd 0.28 -3 8 0 -7 $ 67,364,751.26
BRL Bathurst Res Ltd. 0.64 -4 -9 42 31 $ 110,263,796.84
CRN Coronado Global Res 0.99 -5 -1 -16 48 $ 1,642,924,655.40
JAL Jameson Resources 0.09 -5 -22 -6 -33 $ 28,816,529.55
TIG Tigers Realm Coal 0.009 -5 0 13 31 $ 117,600,321.31
NCZ New Century Resource 0.165 -6 -25 -11 -11 $ 205,687,767.82
AHQ Allegiance Coal Ltd 0.63 -6 -14 37 47 $ 217,005,389.04
YAL Yancoal Aust Ltd 2.16 -7 4 -14 8 $ 2,812,536,000.81
CKA Cokal Ltd 0.12 -8 14 79 107 $ 117,135,289.13
MR1 Montem Resources 0.038 -10 -12 -78 $ 7,718,151.64
NAE New Age Exploration 0.01 -17 -23 -9 25 $ 15,712,388.01
PAK Pacific American Hld 0.014 -22 -18 -33 -13 $ 4,778,773.50

 

 

Australia-China trade the “sun” around which the seaborne coal trade orbited

Like iron ore, coking coal is a hot commodity in China because it is an essential reducing agent for the crude steel produced in blast furnaces.

China actually produces most of its met coal and thermal energy coal domestically, but given the scale of the billion tonne per annum steel industry, China remains reliant on imports to fill the gap and provide high quality product.

Australia provided some 40% of that imported product before the Chinese Government placed an unofficial ban on Aussie coal last year in the middle of its trade war with the Morrison Government.

BHP (ASX:BHP) vice president of Market Analysis and Economics Huw McKay summed up the symbiotic relationship between Australian coal and China’s steelmakers in the mining heavyweight’s recent market outlook.

“Australia was both the largest seaborne exporter of metallurgical coal and the largest seaborne supplier to the clearing market, China,” he said.

“Therefore, this bilateral trading relationship was much more than just one of many in a vibrant and competitive global trade – it was the sun around which the other planets of the met coal solar system orbited.”

Australian producers suffered initially when the ban was put in place, but with prices for our product boosted by demand from alternative markets in Asia, India and Europe, market conditions are starting to look better.

 

Australian ban part of the picture

The iron ore price has fallen ~40% from all time highs in recent weeks on the back of plans in China to curb steel output, but coking coal prices continue to soar even as crude steel production retreats from the record levels seen in the first half of the year.

Commbank analyst Vivek Dhar indicated the ban on Australian coal is part of the perfect storm that has sent coking coal prices in China to unforeseen levels.

“Australia accounted for ~41% of China’s coking coal imports in 2019, before the unofficial ban was in place,” he said in a note yesterday.

“China has struggled to replace Australian coking coal this year. China’s coking coal imports have slumped 43%/yr in the first seven months of 2021 (and 41% lower than the first seven months of 2019).

“The unofficial ban on Australian coal is compounded by reduced imports from Mongolia because of COVID 19 restrictions slowing deliveries at the Mongolia-China border.

“China’s coking coal imports from Mongolia collapsed in July to the lowest level since March 2020.”

Despite China’s obvious need for it, imports have dropped 7% across the year from January to July and are a massive 54% lower relative to the first seven months of 2019. Mongolia was the source of around 34% of China’s coking coal imports in the first seven months of 2021.

“China has boosted imports from the US, Canada and Russia in an attempt to fill the gap left by Australia’s absence,” Dhar said.

“All three countries accounted for 17-22% of China coking coal imports in the first seven months of 2021. China’s imports from the US has seen the most significant increase, with imports lifting 576% per year from January to July.

“From a quality standpoint, we still believe that China will not be able to find suitable substitutes for premium coking coal from Australia. With Australia China tensions still elevated, it’s hard to see when China’s unofficial ban on Australian coal will be lifted.”

Even with prices running out of control, BHP still believes it could be years before China looks to lock up coal from Australia again.

 

Iron ore futures show signs of life

Despite prices remaining high in an historical sense, iron ore sentiment has been unavoidably negative of late, as prices recorded their biggest single day drop ever on Thursday last week.

The 13% fall brought losses for Australia’s most valuable commodity – a $150 billion export industry last year – to 40-45% off the record of over US$230/t seen in mid-May, depending on which price index you use.

Prices in Northern China were down US$3.73 to US$136.71/t on Monday according to Fastmarkets.

But there have been signs of life, with futures for the most traded January contract on the Dalian Commodities Exchange rising 6.2% Tuesday.

It came after China, which had been in the grips of a Delta coronavirus outbreak that had infected a reported 1200 people since July 20, claimed it recorded no new cases of the virus on Monday.

One question is whether the drop is genuinely demand driven – and whether lagging supply will increase enough over the second half of the year and into 2022 to put more downward pressure on prices – or whether the recent plunge in iron ore prices has already baked in expectations of government-enforced supply cuts through the end of the year.

Despite steel output in China rising some 11.8% in the first half of 2021 on 2020 levels, the Chinese Government wants to keep total output to 2020 levels.

Yet demand is still strong enough for steelmakers to want to pay overs to get iron ore to Asian shores, with ships also in short supply due to congestion related to Covid restrictions at Chinese ports.

Rates to book Capesize bulk carriers have climbed to US$50,000 per day on rising demand for both Brazilian and Australian iron ore, levels not seen in a decade.

S&P Global Platts said Brazilian rates were driving the market but that demand on the Capesize T4 Index out of Australia was also supporting prices around those levels, with a ship owner telling the pricing agency even fourth quarter forward rates were rising towards the US$40,000t/day level.

 

Fenix announces dividend policy after record run

 

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
MAG Magmatic Resrce Ltd 0.13 8 -10 -13 -43 $ 27,732,162.48
DRE Drednought Resources 0.045 5 -27 181 221 $ 111,687,454.81
SRN Surefire Rescs NL 0.015 0 7 -56 25 $ 16,555,656.15
ACS Accent Resources NL 0.052 0 2 -45 333 $ 24,233,418.72
MIO Macarthur Minerals 0.525 -1 -9 -18 12 $ 73,371,758.20
HAW Hawthorn Resources 0.044 -2 -6 -40 -57 $ 14,674,686.97
IRD Iron Road Ltd 0.195 -3 -24 -38 107 $ 150,533,063.20
TLM Talisman Mining 0.175 -3 -13 88 35 $ 32,659,967.38
FMS Flinders Mines Ltd 0.885 -4 -8 -44 7 $ 146,898,261.99
MDX Mindax Limited 0.0445 -5 -36 1383 1383 $ 80,536,195.33
JNO Juno 0.17 -6 -28 $ 23,061,860.17
PFE Panteraminerals 0.35 -7 $ 13,090,000.00
LCY Legacy Iron Ore 0.014 -7 -18 -44 180 $ 89,666,339.24
HAV Havilah Resources 0.195 -7 -3 -7 11 $ 59,724,059.46
CIA Champion Iron Ltd 5.55 -7 -18 -1 74 $ 2,810,609,710.20
GRR Grange Resources. 0.635 -8 -23 48 140 $ 740,696,766.72
RIO Rio Tinto Limited 108.35 -9 -15 -17 8 $ 39,605,057,871.66
SHH Shree Minerals Ltd 0.01 -9 -29 -33 0 $ 10,632,368.92
ADY Admiralty Resources. 0.0145 -9 -19 -9 107 $ 18,901,897.72
RHI Red Hill Iron 3.89 -10 260 924 1668 $ 239,912,596.00
CZR CZR Resources Ltd 0.009 -10 -18 -31 -25 $ 31,376,909.49
FMG Fortescue Metals Grp 19.61 -10 -22 -21 9 $ 60,009,026,251.82
FEX Fenix Resources Ltd 0.285 -11 -31 12 84 $ 125,136,688.80
TI1 Tombador Iron 0.057 -11 -35 -37 171 $ 56,359,243.64
MGX Mount Gibson Iron 0.685 -11 -27 -26 -9 $ 825,646,293.21
AKO Akora Resources 0.2 -11 -17 -48 $ 10,468,691.20
BCK Brockman Mining Ltd 0.038 -12 1 -3 111 $ 352,610,820.98
MIN Mineral Resources. 52.22 -13 -15 32 85 $ 9,684,043,236.42
BHP BHP Group Limited 45.08 -13 -12 -11 18 $ 131,168,176,977.24
MGT Magnetite Mines 0.029 -17 -36 12 187 $ 88,056,246.38
FEL Fe Limited 0.054 -18 -51 15 116 $ 40,073,955.35
RLC Reedy Lagoon Corp. 0.018 -18 0 -28 64 $ 7,520,418.66
EFE Eastern Iron 0.012 -20 -20 7 61 $ 8,942,781.17
GWR GWR Group Ltd 0.215 -20 -43 -24 194 $ 62,071,220.82
HIO Hawsons Iron Ltd 0.094 -22 -39 139 254 $ 66,313,924.35
GEN Genmin 0.19 -22 -5 $ 53,587,191.50
SRK Strike Resources 0.17 -24 -42 -15 55 $ 43,200,000.00
VMS Venture Minerals 0.073 -25 -44 24 143 $ 98,733,444.32
MGU Magnum Mining & Exp 0.077 -30 -56 -15 71 $ 33,737,854.15

 

While 2021-22 is filled with uncertainty for iron ore producers, the astonishing prices seen in the back end of 2020-21 has set them up for a bumper reporting season.

The majors are all showering their shareholders with multi-billion dollar dividends, but some of the smaller players in the iron ore market are doing the same as well.

$125 million cappedFenix Resources (ASX:FEX) on Monday reported that its first year of production at the Iron Ridge mine in WA generated unaudited revenue of $113 million and unaudited NPAT of $62 million, with unaudited headline profits of $49 million.

Managing director Rob Brierley said the junior will distribute 50-80% of after tax profits on an annual or semi-annual basis starting from the release of its audited FY21 financials in September.

Fenix has also entered into a swap arrangement to hedge against a drop in the iron ore price and ensure it can keep Iron Ridge operation ‘at cost’.

“Our unaudited financial results illustrate the rapid and relatively seamless execution of our project delivery strategy,” he said.

“We have hit the ground running and taken advantage of robust iron ore prices. The iron ore swap arrangements we entered into in July are already in-the-money and these arrangements secure Iron Ridge’s future for FY22 and beyond.

“We are targeting release of our audited FY21 financial result in mid-September, which will include the declaration of our maiden dividend.”

 

Fenix Resources share price today: