Experts say suggestions China could reverse a ban on Australian coal that signalled an escalation of trade tensions between the two nations in late 2020 are wide of the mark, despite soaring prices for the commodity in the Middle Kingdom.

News reports last month led by the Financial Times and Reuters that China had taken Australian coal cargoes out of port led to further questions about whether China’s energy crunch supply-led price shocks could lead to a softening of its stance.

However, analysts covering the seaborne coal trade suggest there is no real indication that could be on the cards.

“There’s been quite a lot of reporting in the past couple of weeks that has been very misleading, really, I guess basically giving the impression that China has changed its policy with regards to Australian coal flowing into China,” London Stock Exchange Group global coal market research lead analyst Toby Hassall said.

“There’s no evidence whatsoever that policy’s changed.

“With AUKUS and those political developments over the past six weeks or so, the political tensions with China, you know, they haven’t improved at all, but probably actually got much worse.

“I don’t think there’s really much rationale for China to change its stance there.”


Ship tracking shows coal ban remains watertight

Alexandre Claude, CEO of DBX Commodities, said high frequency, real time shipping data tracked by the firm shows there’s no reality to the claims China is accepting Australian cargoes back.

Some small cargoes related to special relationships between companies may be arriving, but the truth is little if no Australian coal ships are calling into port in China.

China remains a planned economy and according to Claude, China is unlikely to remove the ban on Australian coal because it can lift domestic production and Xi would not stomach looking weak in a diplomatic dispute.

Fastmarkets and Argus last week reported that some Australian coal cargoes were allowed to clear customs in China on Wednesday.

Argus believes that could clear up 4-5Mt of coking coal for use in the local market, but only coal that cleared customs before the unofficial ban was imposed in October last year will be released to buyers who have already paid taxes on the cargoes.

That means the ban on new shipments remains in place.

“We are all going to wait and see what happens next, but the customs authorities have made it very clear that this has nothing to do with new arrivals of Australian cargoes,” an East China-based mill official told Argus.


China looking to bring on supply to dent prices

China has made moves in the past week to cap coal prices, with speculation the National Development and Reform Commission wants to cap prices at RMB440/t at the mine gate seeing thermal coal futures in China collapse.

“Most mines in China are expected to turn a profit using the target price,” Commbank analyst Vivek Dhar said in a note last week.

“Given that coal production in China is dominated by State‑Owned Enterprises (SOEs), it’s unlikely that the new rules will see much pushback, despite the implication that coal mining profits will now reduce significantly.

“While it can be argued that lower mining profits will dent incentives to expand coal production, it’s worth noting that policy and regulation have been larger determinants of China’s coal production over the last year.”

Dhar said coal importers would likely receive subsidies to balance their losses, supporting premium prices for imported thermal coal.

China’s ability to effectively switch on supply shows the dominant role domestic coal supply plays in the local market.

It also increased imports in September by 76% on a year ago to 32.7Mt based on official data, with big increases in Russian and Indonesian coal imports displacing Australian cargoes, which have been redirected to other markets in the region.


A perfect storm hits seaborne coal supply

While prices in China have seen the largest growth this year, markets elsewhere are also well beyond normal levels.

According to Fastmarkets premium hard coking coal FOB Dalrymple Bay in Queensland was fetching US$404.59/t on Friday, with hard coking coal drawing $341.34/t, close to historic levels.

Newcastle index thermal coal is still fetching in and around the US$200/t mark, three times the sale price of a year ago.

While demand in the northern hemisphere has dominated the headlines, tied in with rising prices for oil and gas, and consequently power, according to Hassall supply constraints have been just as telling.

He says the number of supply issues impacting the market in recent months has been like flipping a coin five times and only getting heads.

“I can’t think of any time where there’s been such a series of events that have taken place that have had such a major impact on the market,” he said.

“Coincidences do happen, and I guess you can flip a coin, and you can get five heads in a row. So these things are randomly distributed.

“But the bigger picture is that energy prices are extremely high and it’s feeding through into this, you know, rapidly accelerating inflation environment globally.

“There are big implications for what’s happening in energy markets at the moment. And it’s very interesting to watch it all unfold.”

There have been Covid restrictions on the Mongolia-China border, rail issues in Russia, heavy rain and Covid lockdowns in Indonesia and force majeure due to social unrest at Richards Bay in South Africa.

Fires have also struck at coal ports in Russia and South Africa, Hurricane Ida hammered the US Gulf Coast and a dispute between Glencore and the Colombian Government around the Cerrejon mine have all struck simultaneously to take supply out of the market at a critical time for northern hemisphere demand.

Claude calls it a “perfect storm”.

“Nearly all the major exporting countries had issues,” he said.

“This is supported by cargo tracking data. DBX is showing that for the main coal exporting countries – Russia, Indonesia, USA, Australia, South Africa, Colombia – coal shipments fell from 98Mt in July 2021 to 91Mt in September.

“DBX expects October coal shipments for the main coal exporting countries to rebound to 94mt.”


How long will high prices persist?

Coal producers are gearing up for what they see as a sustained period of high prices supporting big profits over the next year.

Whitehaven Coal (ASX:WHC), for instance, believes it will retire its debt next year despite losing $87.3 million last financial year, and turn an $808.5 million net debt position on June 30 into a net cash position by March next year, such has been the pace and magnitude of the uptick in prices.

Whitehaven’s Paul Flynn said at the miner’s AGM last week the Chinese coal ban had driven higher demand elsewhere for high vol coal from Australia.

“Looking now at forecasted demand for seaborne thermal coal to support industrial activity in customer markets, the amount of supply coming from existing mines falls well short of projected demand,” he said.

“This supports a robust price environment for seaborne coal market. Considering the fundamentals driving Asia’s demand for high quality coal, we view Whitehaven as being in a prime position to make the most of emerging opportunities in the region. Not just with our current portfolio of operating mines, but also our growth projects.”

DBX’s Claude said he remained cautious on prices going forward because of the potential for China and India to ramp up domestic supply from their coal mines. There is also the potential for high prices to cause demand destruction, especially for industrial users who can switch to other fuel sources.

Longer term, Hassall says price shocks could continue to occur and benefit producers even in times when demand is falling.

“Will demand be falling faster than supply? It’s a really interesting question,” he said.

“And I guess the world’s biggest producer of seaborne thermal coal Glencore has actually … been acquiring thermal coal mines at a time when all the other major miners are divesting.

“And so I guess that tells you, okay, Glencore is a very astute company, they exist to make profits, and that tells me that their strategy or their outlook is that … yes, there won’t be many new mines coming into the market, so supply will be tight and prices may actually be relatively elevated even as demand is not growing and starting to fall.”


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