Queensland's Dalrymple Bay Coal Terminal jetty, where much of Australia's thermal and metallurgical coal is exported to global markets.
Source: Dalrymple Bay Infrastructure Ltd.
Australian supply will replace much of Russia's metallurgical and thermal coal shipments to China following reports the latter has relaxed a 2020 ban on coal from Down Under, according to industry observers.
China's hunger for steelmaking coal appears to have prompted a relaxation of an unofficial ban on imports of Australian coal. China cited domestic pricing as a main driver of the ban in a verbal notice to certain utilities in May 2020, while many analysts linked the move to trade tensions between the two countries.
China's state planner is reportedly set to authorize the resumption of coal imports from Australia by top steelmaker China Baowu Steel Group Corp. Ltd. as well as state-owned utilities China Huaneng Group, China Energy Investment Corporation Ltd. and China Datang Corporation Renewable Power Co. Ltd.
While Australian producers have largely moved on since the ban to meet demand from European buyers eager to pay a premium for their thermal coal, Australia's superior quality coal is looking more attractive to China, given Russia's logistics challenges, said Lloyd Hain, managing director at consultancy AME Research.
"The Chinese steel mills value Australian coal because of its low-sulfur, high-CSR content and you can't get anything like it anywhere else in the world, [making it] therefore the perfect blending agent for China's domestic coal," Hain said in an interview. "You will see consistent tonnages start to come back into China from next quarter."
CSR, which stands for "coke strength after reaction" with carbon dioxide, is a key means of evaluating the quality of metallurgical, or coking, coal and controlling the performance of blast furnaces in steelmaking.
"China is also the main buyer of spot cargoes, and is therefore the market-maker," Hain said.
Ending the restrictions will lead to greater market liquidity, thus providing more data points and greater confidence in various pricing mechanisms, he said.
Coking coal prices have been on the rise since early January, when reports emerged about China's policy change. Thermal coal prices have seen a more modest uptick over the same period.
Structural shortage
Lifting the ban will alleviate a coking coal shortage in China, as the country has not been able to fill the gap left by Australian coking coal, Chinese analysts and industry players said.
As the world's biggest coking coal consumer, China relies on imports for about 28% to 32% of its domestic supplies, and Australian coking coal had long been favored by steel mills and coking plants across coastal regions, brokerage Orient Futures said in a note published Dec. 29, 2022.
China imported 57.4 million tonnes of coking coal in the first 11 months of 2022, a decrease of nearly 17% compared with the same period of 2020, according to China's General Administration of Customs data. Australian coal accounted for 45% of total imports in 2019 and 2020, but the country's share slumped to 3.8% in the first 11 months of 2022.
Chinese steelmakers turned to Russia after the unofficial ban on Australian coal and supply disruptions in Mongolia, with Russian coal miners offering steep discounts amid sanctions following its invasion of Ukraine. Russian shipments to China more than doubled year over year to 19.3 Mt in the first 11 months of 2022, China Customs data showed.
Australian imports will crowd out the market share of Russian coking coal, which is "not cheap enough to make people ignore its [poorer] quality," Liu Lei, coal analyst at Today Think Tank Energy, said in an interview.
Russian coal has a lower CSR content that is less amenable to large blast furnaces, and its higher levels of calcium and magnesium can affect the steelmaking process, Mysteel Global analysts wrote in a Jan. 6 note. Steel mills and coking plants will increase use of high-CSR coal, which will replace a portion of Russian coal imports, the analysts said.
"Importing Australian coal will have a positive effect on the company's coal procurement and structural adjustment, and lower the transportation costs of our Zhanjiang production base [in South China's Guangdong province]," Baoshan Iron & Steel Co. Ltd., the listing arm of Baowu Group, said in a comment on Shanghai Stock Exchange's investor relations platform Dec. 15, 2022.
Baosteel did not respond to a request for comment on the import policy change.
Resetting political ties
When asked about the motivation for China's policy shift on Australian coal, Hain noted that reports of the move emerged within weeks of Australian Foreign Minister Penny Wong visiting Beijing. Wong's visit in late December 2022 aimed to restore dialogue after years of strained relations while marking the 50th anniversary of diplomatic relations between the countries.
Hain said it makes sense for China to use Australian thermal coal, which tends to arrive in cargoes exceeding 100,000 tonnes, compared with Russia's 30,000- to 40,000-tonne cargoes.
"It's also not unusual for Russian cargoes to be delayed by weeks due to derailments on the eastern rail corridors, which is unusual in Australia, whose coal is therefore favored for its reliability as well as quality," Hain said.
Australian coking coal producer Bowen Coking Coal Ltd. expects the ban relaxation to be positive for companies in Australia, which is "geographically in the best position to supply into the Chinese market," CEO Gerhard Redelinghuys told S&P Global Commodity Insights.
"Longer term, we see a supply constraint as demand outstrips supply due to a lack of new mines coming into production, which will have a further positive impact on existing producers," Redelinghuys said.
Most of Australia's 2021 earnings from metallurgical and thermal coal exports were derived from India and Japan, according to Australian government data. Australia is the world's second-largest thermal coal exporter, behind Indonesia but ahead of Russia, and the largest metallurgical coal exporter by far.
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