China's steelmaking coal imports from Australia may never return to pre-2020 levels as seaborne coal trade flows shift to India and Indonesia, analysts said.

Nearly a year since Beijing ended its unofficial embargo on Australian coal, China's metallurgical coal imports from all suppliers have recovered past the pre-ban level. Total imports increased 57.1% year over year to 81.1 million metric tons in the first 10 months of 2023, according to S&P Global Market Intelligence's Global Trade Analytics Suite. Mongolia and Russia supplied the bulk of China's imports, with Australian shipments accounting for less than 3% during the period.

Australia, the largest seaborne coking coal supplier, has diversified its exports away from China during the two-year ban. Emerging economies including India and South Asian countries are hungry for Australian premium metallurgical coal to feed their blast furnaces amid rapid urbanization. This has kept Australian supplies tight and prices elevated. India is the biggest seaborne coal importer so far in 2023, followed by Japan and China, according to S&P Global Commodities at Sea data.

"India and Indonesia prices might be the bellwether of global seaborne metallurgical coal prices [in the longer term] rather than China," Chao Yuke, an analyst with the China Coal Transport and Distribution Association (CCTD), said Nov. 22 during an online briefing.

Turning to cheaper, low-quality coal

Chinese buyers turned to Russia's low-sulfur and low-ash coking coal and boosted imports from Mongolia when Australian supplies were cut off, and they have continued to favor the alternative supplies for their "excellent price competitiveness," Simon Wu, senior consultant for coal at Wood Mackenzie, said in an email interview.

"Australia's supply and logistics issues have kept its price high, more expensive than the Chinese domestic coal, making it unaffordable to the Chinese steel mills who struggle to make ends meet," Wu said. Nearly 40% of companies in the China Iron and Steel Association reported losses in the first three quarters of 2023 due to shrinking demand from the property sector.

China will likely increase Australian imports when steel prices make it economical, but it would be "difficult for it to go back to the high volume of around 36 MMt in 2020 because the coking coal demand of China will also decline," Wu said. The consultant expects coking coal imports from Australia to recover gradually but slowly to around 25 MMt in 2033.

China's increased appetite for high-grade iron ore to decarbonize the steelmaking process also reduces demand for metallurgical coal, said Pranay Shukla, director of dry bulk freight and commodities research at S&P Global Commodity Insights. High-grade iron ore has lower impurities and requires less coke as a reducing agent.

Commodity Insights' Metals & Mining research team forecast that China's full-year iron ore imports will rise 54 MMt to 1,162 MMt in 2023, according to the Commodity Briefing Service report released in November.

The Chinese steel industry is aiming for peak carbon emissions by 2030. To decarbonize blast furnaces, which contribute around 90% of the country's crude steel production, steelmakers are encouraged to build coal-free electric arc furnaces and develop hydrogen metallurgy technology that replaces coke with hydrogen to remove oxygen from iron ore.

Booming demand from India and Indonesia

Australian coal miners have continued to rely on South Asian markets nearly a year after China ended its restrictions.

"Their size of economy, lack of domestic coking coal resources, and potential to modernize their huge population are the most significant factors to consider," Wood Mackenzie's Wu said of India and Indonesia. "The demand growth of these countries will be a crucial support to the prices."

The Indian Steel Association expects India's annual coking coal imports to rise to 120 MMt by 2030, from the current 70 MMt-75 MMt, to meet the country's ambition to increase annual crude steel production to 300 MMt by 2030, the group said in November. Nearly 46% of India's steel is produced through the coal-based blast furnace-basic oxygen furnace (BF-BOF) route, but domestic coal can only meet 10%–12% of demand, the report said.

"BF-BOF steelmaking capacity in India is expected to significantly increase over the next decade due to the country's low-grade domestically produced iron ore, lack of scrap steel and scrap collection infrastructure, and cost concerns related to domestic energy security," Jefferies analysts said in a Nov. 6 note. While India is ramping up domestic met coal production, "higher ash content in Indian coal will continue to be an issue, with domestic mine supply growth being largely of lower-quality coals."

Meanwhile, Chinese companies' massive investment in Indonesia's stainless steel supply chain will drive Indonesia's metallurgical coal import demand, CCTD's Chao said. Chinese companies have built coke plants with about 20 MMt of annual capacity and will gradually put them into production in the PT Indonesia Morowali Industrial Park, which is a joint venture between China's Tsingshan Holding Group Co. Ltd. and the Indonesian government, according to Chao.

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