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Exit the Dragon? New port restrictions to limit Chinese met coal imports

China's National Development and Reform Commission (NDRC) has imposed further port restrictions on both metallurgical and thermal coal, effective from 14th November.

There was no official announcement, but traders and steel mills have told Platts the NDRC verbally informed the General Administration of Customs that any imported coal would no longer be able to clear customs until the end of 2018.

This means the volume of imported coal will likely be halted through the end of year, across all Chinese ports including the main northern ports of Caofeidian, Jingtang and Bayuquan. Those end-users who have outstanding import quotas for 2018, however, may report to the authority for review and approval, case-by-case.

Port-related restrictions have been frequently imposed by the Chinese government this year. In April, users of southern ports were notified they would no longer be able to receive any imported coal. In July, northern ports such as Jingtang had transport restrictions imposed, with diesel-fueled trucks banned as an environmental measure.

Import target

Similar to many other commodities, government control of imports typically aims to support domestic producers and in this case, domestic coal prices, by ensuring the total import volume does not exceed the previous year’s.

According to customs data, China imported 271 million mt of coal in 2017, including both thermal and met coals, at a monthly average of 22.6 million mt. This year 202.6 million mt were imported through September, a monthly average of 22.5 million mt. Met coal accounted for just 25.8% of the total imported coal in 2017.

However, the total volume of met coal imported into China this year through September saw a steeper decline, dropping 6.2% compared with the same period of 2017. The above chart shows China has imported 50 million mt of met coal through September 2018, compared with 53 million mt reported for the same period of 2017.

Despite the lower met coal arrivals for this year, the commodity has been included in the port restriction policy. This could be due to the relatively large share of thermal coal in the mix, accounting for 75% of total Chinese coal imports in 2017.

Dip expected in Q4

A possible implication of the port restrictions through 2018 could be a sharp fall of the met coal import volume during the last quarter. This is also suggested by the Platts spot trade data.

Platts spot trade data for met coal is a leading indicator to the Chinese official reporting, on a two month-ahead basis. This is because the deals observed typically require a two-month lead time for the physical cargo to arrive at Chinese ports.

For the first 9 months of 2018, Platts observed 16.4 million mt equivalent of met coal trade to China, 33% of China custom’s total reporting of 50 million mt. Based on this data, Platts’ observation of 1.8 million mt of spot trade for October would suggest December arrivals reaching around 5.5 million mt, but whether or not this volume will be customs-cleared and reach end users is now in question.

Platts observed spot trade data going back to January 2016 demonstrates a generally positive correlation with that of the official China custom reporting. The correlation between Platts’ data and China customs reporting were consistently positive near 60%. Although not perfect for forecasting, the Platts spot trade data makes it statistically possible for the market to stay ahead of the curve, to gauge a forward trend by approximately two months.

Two-tier market ahead?

With China’s temporary withdrawal from trade flows now likely, a two-tier market for met coal could emerge, with domestic prices potentially strengthening to outpace international values.

Platts last assessed Chinese imports near parity levels of $223/mt, but the port restrictions could potentially increase the spread.

This situation could be short-lived - in the absence of official announcements, the market is expecting China to re-open to the international market as early as January 2019.