China's door-slam on thermal coal imports a golden opportunity for India

Beijing's sudden decision to drastically curb imports of thermal coal into the country's ports presents a golden opportunity to Indian coal buyers to pick up large volumes of Australian power station fuel at discounted prices, according to a S&P Global Platts analysis.

With little fanfare or publicity April 13, Beijing quietly implemented a new round of import restrictions on seaborne-traded cargoes of thermal coal, including more stringent customs checks and some outright bans on ships discharging at certain Chinese ports.

The measures have alarmed shippers of thermal coal and accelerated the descent of spot prices at the Newcastle coal trading hub, the main gateway for Australia's thermal coal exports to Asia.

After soaring to $88/mt FOB Newcastle in early February on strong winter demand from China, the high-ash grade of Newcastle 5,500 kcal/kg NAR thermal coal has plummeted to $65/mt FOB Wednesday.

Beijing's import curbs have the potential to upend the mining, shipping and marketing plans of Australian high-ash coal shippers as China has been a large customer for this type of thermal coal.

China last year received 23.68 million mt of thermal coal from the Australian state of New South Wales, home to the main thermal coal handling port of Newcastle, up 9.8% on 21.56 million mt in 2016.

At current export rates, China's appetite works out to nearly 2 million mt/month of Australian thermal coal, and if this volume is deflected by China's import restrictions it will need to find a home elsewhere.

Japan, South Korea and Taiwan are obvious candidates for any Australian high-ash 5,500 kcal/kg NAR cargoes unable to land in China, though each country prefers coal with a lower ash content and slightly higher calorific value to that of China.

Southeast Asian markets are growing in terms of import demand for Australian coal, but are relatively small and underdeveloped in some cases in terms of import infrastructure.

This really leaves India as a viable option for Australian shipments unable to enter the Chinese market.

To date India has been an infrequent customer at Newcastle port for cargoes of thermal coal.

Export statistics show India booked only 710,000 mt of New South Wales thermal coal in 2017, and astonishingly in the months of April through to October 2017, India did not book any tons at Newcastle port.

The key to Indian demand is price. Experience shows buyers from the Asian subcontinent will book Newcastle 5,500 kcal/kg NAR thermal coal when the arbitrage window is open, as happened quickly last November when Indian buyers took delivery of 320,000 mt from the Australian port.

Currently, Australian 5,500 kcal/kg NAR thermal coal can be delivered to India's east coast ports at a price of $78.25/mt CFR, including Panamax freight of $13.25/mt, Platts prices show.

This delivered cost for Australian high-ash thermal coal is $15.60/mt less than the traditional mainstay of the Indian import market, where South African 5,500 kcal/kg NAR thermal coal is at $93.85/mt CFR East Coast India.

Plainly, the opportunity is there for Indian buyers to step in and book Australian cargoes at attractive prices, and it will be interesting to see if they take advantage of this rare set of market conditions.