Monsters of Rock: Like the return of flared jeans, Australian coal is back in fashion in China
Link copied to
Entire businesses and industries have been made and torched on the idea of buying “pre-loved” fashions and repackaging it as the new thing.
Like flared jeans and 90s football shirts China is re-embracing the free market, opening the door to the resumption of normal trade between Australia and the Middle Kingdom by effectively ending a ban on our coal that has persisted since October 2020.
The Wall Street Journal reported today that the Local Government in Guangdong has told customs officials to clear Aussie coal cargoes.
Located in the south of the country, Guangdong is the main thermal coal import terminal in China.
Just so you know the thaw is really on, even the parochial Global Times, China’s often inflammatory State-owned English language tabloid, is reporting that the coal trade can resume.
What will it mean for coal prices, which have enjoyed an extraordinary boom as Australian coal has become highly sought after by European buyers repulsed by previous supplier Russia’s invasion of Ukraine?
Wood Mackenzie’s coal boffin Rory Simington says the resumption of the Aussie coal trade should, ultimately, lead to lower seaborne prices.
“The lifting of the ban will improve the efficiency of the global trade by reducing the freight requirement, theoretically at least resulting in lower overall prices,” he said.
“Since the introduction of the ban, some sub-optimal changes to trade flows have eventuated including higher volumes of Australian thermal exports into India, an increase in flows of US and Canadian coking coal to China.
“Over time the lifting of the ban should result in a reversal of these trends.”
Newcastle thermal coal futures were paying US$377/t yesterday, with coking coal around US$300/t.
Resulting from the thaw of frosty trade relations between Xi’s China and the new Albanese Labor Government, Australian cargoes have been reported to have been sold to Chinese companies already since three energy providers and its largest steelmaker, Baowu, were given the go ahead to resume imports.
But not all grades of coal are created equal.
Simington says there is little difference between Australian and Chinese domestic prices right now, meaning it will take a while for trade to resume. Meanwhile Australia’s Newcastle 6000kcal thermal coal will be of less interest than coking coal for steelmakers.
Lower quality Australian high ash thermal coal offers little arbitrage for China’s power suppliers, while coking coal users will have to consider the cost of changing blends against the spare US$10-15/t advantage Australia’s met coal producers provide.
“Australian thermal coal exports to China are almost exclusively lower quality “high-ash” coals with typical energy contents of 5500nar and lower. With the Newcastle benchmark 6000nar coal price almost three times the 5500nar price, any conceivable price impact will be limited to lower quality thermal coals,” Simington said.
“Australian producers are expecting Chinese demand will actually be strongest for coals at the lower end of the quality scale with energy contents down to 4800nar. Conversely for coking coal, Chinese demand is typically strongest for benchmark quality premium hard coking coals.
“While this could be bullish for benchmark coking coal prices much will depend on steel demand in China. A drop in Chinese domestic coking coal prices could diminish Australian coal’s price advantage and curtail demand.”
However, Simington said Australian producers were ‘cautiously optimistic’.
“Australian producers are cautiously optimistic about the lifting of the ban − “more customers is always better than less customers”,” he said.
“However, there is no indication from producers that they would be willing to offer discounts in order to revive trade volumes to China.”
It’s all about energy and gold, two commodity classes which enjoyed a run overnight after the US inflation print arrived, showing a 0.1% monthly drop in December to 6.5%, the lowest CPI number since October 2021.
Oil and gas prices rose overnight as well owing to predictions of cold weather to come in the northern Hemisphere after a so far mild winter, with energy up 2.
Stanmore Coal (ASX:SMR) climbed 3.79%.
Gold stocks meanwhile struggled to hold onto their morning gains despite a strong morning session after prices lifted overnight to US$1897/oz, with the broader materials sector up just 0.24%.