MET COAL SERIES: Australia's comeback as supplier to China uncertain as both find new trade partners

This five-part story series examines the coking coal market from a few angles. The first part focuses on pricing evolution and spot liquidity. This second part analyzes how trade flows have changed, the third traces the rising importance of environment, social and governance criteria, while the fourth takes a deep dive into the workings of coal trading platforms that may inform spot price assessments. The final part examines the current state of the spot market and explores directions for future evolution.

China's return to buying Australian metallurgical coal since January is not expected to open the floodgates for higher volumes in 2023, indicating a major rejig in met coal trade flow in Asia is not yet imminent.

Unfavorable price spreads, weak Chinese demand due to flagging steel markets and alternative suppliers making big inroads into the China market were likely to keep Australian coal purchases limited, industry sources said.

China has resumed importing met coal from Australia after a hiatus of over two years, with the first shipment reaching Chinese shores in February.

Platts, part of S&P Global Commodity Insights, recorded 8-10 deals taking place for premium hard coking coal over January-April on both an FOB Australia and CFR China basis after trade relations between the two countries thawed.

China's met coal imports from Australia averaged 42 million mt/year over 2017-2020, S&P Global data showed, before political friction led to an unofficial ban by China on Australian coal in late 2020 that halted the flow.

Traditional met coal trade flows have been reshaped since the friction emerged, especially in Asia. These changes have also been driven by the pandemic, the Russia-Ukraine war and related weakness in the global economic landscape.

The most prominent trade flow changes of the past two-three years are seen in China, India, Australia and Russia.

Australia loses dominance in China

A clear picture of why Australian coal suppliers may not take a bigger slice of Chinese markets in 2023 despite the improving relationship can be drawn from the pace of shipments.

After importing around 1.4 million mt of met coal over January-April, around 622,000 mt of coal from Australia is in transit to China through May, equating to roughly 2 million mt of coal purchases to date in 2023, S&P Global data showed. This is sharply below the four-year average over 2017-2020 of 12 million mt for January-May.

China's coking coal imports from Australia are expected to reach 8 million-10 million mt in 2023, analysts said, around 28 million-30 million mt less than in 2020 before the trade was halted.

With the Chinese-Australian trade relationship on a mend but overshadowed by an ever-changing geopolitical landscape, it may appear that both Chinese buyers and Australian suppliers have grown comfortable with the current trade flow.

Near-term prospects brighter

However, despite a slower pace and low shipment expectations, Chinese buyers may still prefer Australian coal in the near term, according to sources.

An analyst with a Chinese steelmaker said arbitrage trade opportunities could emerge for imported Australian coal by the third quarter to coincide with China's peak demand season over Q2-Q3.

China is expected to import 2.85 million mt of Australian met coal in Q3, up from an estimated 1.95 million mt in Q2, Everbright Futures said.

With Australian met coal prices lower currently, the narrowed spread to Chinese coal prices could spur buyers to boost imports in the near term, according to consultancy Galaxy Futures.

Australian coal prices have risen recently but remain below the highs seen earlier in the year when severe wet weather hampered supply.

Platts assessed premium low-vol hard coking coal at $220/mt CFR China May 12, below a year-to-date high of $343/mt in March, S&P Global data showed. The PLV FOB Australia benchmark was assessed at $242/mt May 12, trailing a year-to-date high of $390/mt in February.

PLV FOB Australia prices are expected to fall to around $220/mt by year end led by supply recovery due to an imminent El Nino dry weather event, analysts at S&P Global said.

A large portion of China's imports of Australian coal are premium hard coking coals, which China has sought to replace through domestic supply. A key determinant of the volume of Australian imports is how domestic prices compare with imports.

Prior to the unofficial ban, the import arbitrage between CFR China PLV and Shanxi domestic PLV culminated in China being a defacto clearing market for Australian coal.

If the ex-China market can bear higher prices for Australian coal, China could be priced out of Australian material, especially when the spot Shanxi domestic PLV comes at least $10-$15/mt cheaper than seaborne material on a CFR China equivalent basis. The import arbitrage is expected to reopen as Australian coal makes its way to China, according to sources.

Neighbors step in

The other major reason why Australia may not be able to make major inroads in 2023 is China's flourishing trade with neighbors Russia and Mongolia.

Western restrictions on Russian commodities such as oil, natural gas, metals and coal have led to robust trade ties with China in recent months. Russia's largest coal buyers in Europe have sanctioned coal shipments following its invasion of Ukraine, forcing suppliers to find alternate markets.

Russia had been a steady exporter of met coal to China until the absence of Australian coal allowed it to take a larger market share. Between 2017 and 2020, Russia exported a combined 14.4 million mt of met coal to China, but in 2021 alone, Russian shipments reached 12.8 million mt, and jumped a further 96% to 25.1 million mt in 2022, according to S&P Global data.

Shipments have already reached 11.8 million mt to date in 2023 and hit a record monthly high of 3.7 million mt in March.

Russia is expected to be the major seaborne exporter to China this year, as the coal would be attractively priced at a time when mill margins are barely breakeven, analysts at S&P Global said. Exports are forecast at 22 million-24 million mt for full year 2023, they said, and comprise mainly non-premium hard coking coals, ranging from semi-hard, semi-soft, PCI and anthracite.

Mongolia has been also slowly increasing market share in China and has been the largest met coal exporter to China since 2021. Its coals typically bear characteristics of hard coking coal, mainly used as a blending coal, with raw coals being washed at several washing plants near the Ganqimaodu border.

Mongolia has been only surpassed by Russia in shipments during the first five months of this year, China customs and S&P Global data showed.

In March, Mongolian coal exports to China reached 4.76 million mt, up almost fourfold from February, China customs data showed.

China could import about 41.8 million mt from Mongolia in full year 2023, up 63% from 2022, according to Everbright.

This jump is mostly due to a new railway line that came online in 2022 linking Mongolian and Chinese land ports, analysts said, adding that the easing of pandemic restrictions have also improved coal transportation between the two countries.

India's growing demand

India has been ramping up imports from Australia and Russia since China disappeared from the Australian export scene and the Russia-Ukraine war began, recently reaching an all-time high.

This is largely because of growing Indian steel demand as steelmakers strive to keep pace with the country's high-growth GDP.

India's steel demand is seen rising to around 130 million-135 million mt in 2023 from 125 million mt last year, Jitendra Nanda, managing partner of trade at global trading firm Balta, said in an interview.

This would lead to higher coking coal demand, keeping it about 5-6% higher than last year, to be met mostly by Indonesian, Russian and largely Australian coking coal, Nanda added.

Imports from Indonesia hovered around 1 million-2 million mt in 2021 and 2022, while Russian shipments steadily increased over those two years, according to S&P Global data.

Russia exported 4.1 million mt of coal to India in 2022, while shipments to date in 2023 have already reached around 63% of the 2022 volume and touched a all-time monthly high of around 1 million mt in March, the data showed.

On the other hand, India's imports from Australia could decline slightly in 2023 from 2022 but remain at elevated levels compared with China's imports.

"We think India will import around 48 million-50 million mt of Australian coking coal" this year, S&P Global analysts said in a report.

A robust India-Russia relationship and India's greater reliance on Australia for its coking coal needs would mean Asian trade flow changes would be minimal this year.