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China diversifies coal supply amid import ban on Australian coal

With an unofficial ban by the Chinese government on Australian coal since 2020 impacting global trade flows of the bulk commodity, experts expect to see a more diversified structure for China's coal supply this year if the ban remains in place.

In 2020, China's overall coal imports rose 1.5% to 303.99 million tonnes, according to data from the General Administration of Customs. The world's largest coal consumer's imports of the bulk commodity grew at their slowest pace since 2016, official data showed. The growth rate of China's coal imports has maintained below 10% since 2017, with the government implementing strict import restrictions to support domestic coal producers by allocating incoming quotas to local end-users in recent years.

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Since state-owned utilities and steel mills in China were given verbal notice from customs to stop importing thermal and coking coal from Australia in October 2020 following higher Australian coal imports and political tension between the two countries, Chinese end-users have been turning to other sources of supply, and experts believe that this shift will continue this year.

Due to the unofficial import ban, export volumes to China from non-Australian origins, including Canada, Russia, Indonesia and the U.S., have increased across different grades of metallurgical coal, according to Jeffery Lu, managing editor of S&P Global Platts' metallurgical coal and coke segment.

"At the moment, most market participants are looking at the status quo of such diversified supply structure, at least until China lifts its import ban," Lu said.

Simon Wu, a Beijing-based senior consultant with Wood Mackenzie, said Mongolian coal miners have been the largest beneficiaries due to the quality of Mongolian coal, although a resurgence of COVID-19 cases in the fourth quarter of 2020 hurt its export recovery to China. Wu added that the price for coking coal in Mongolia's Ganqimaodu border has surged from a normal level of between 1,000 yuan and 1,200 yuan per tonne to 1,400 yuan/t recently.

As the pandemic situation in Mongolia is being contained, Wu expects the export volume from Mongolia to China to rise to a record in 2021 and for China's coking coal imports from Russia, the U.S. and Canada to also increase.

On the other hand, Australia and New Zealand Banking Group Ltd., or ANZ, said in a Jan. 28 report that with China's shutout, Australian coal is rapidly finding new destinations, noting that the drop in exports to China has been more than offset by gains in exports to Japan, India, South Korea and Thailand, according to recent data.

Expecting promising demand for thermal and metallurgical coal, ANZ analysts expect global benchmarks for both to recover from recent lows with new trade flows being established. The Australian premium hard coking coal price was estimated to average $125/t in 2020, compared with $179/t in 2019, while the Newcastle benchmark thermal coal price was estimated to average $57/t in 2020, according to a report from Australia's Department of Industry, Science, Energy and Resources.

According to a Shanxi-based coal analyst who prefers to be unidentified due to the sensitivity of the topic, some Chinese steelmakers have expressed their need for Australian coking coal to the Chinese government with the help of industry associations, but there are no clear signs yet on whether China will lift or maintain the ban.

The current sentiment is mixed, and China's import restrictions on Australian coal are a key uncertainty to the metallurgical coal market this year, according to Platts' Lu, with pessimists forecasting the ban to remain in place until June and optimists expecting phased relaxations. The first phase might see the existing stranded Australian cargoes, estimated at 50, to get cleared at customs, Lu said.

Coke-makers and steel mills in China have proven over the past months that they can manage to continue their operations without Australian coking coal, but some extra costs were generated, resulting in lower production efficiency and margin for steel mills, according to Lu and Wood Mackenzie's Wu.

In terms of thermal coal, the National Development and Reform Commission said in a press conference that they will "appropriately increase imports" and urged domestic miners to boost output in order to relieve the pressure on power coal supply in the winter heating season. In December 2020, China's coal imports more than tripled to 39.08 million tonnes from 11.67 million tonnes in November, but last year's winter reportedly saw several major Chinese cities going dark as authorities limited power usage amid a coal shortage.

China's coal production was up 0.9% to 3.84 billion tonnes in 2020, according to official data. Zhang Min, a coal analyst with commodity research consultancy Zhuochuang, said 2020 production was disrupted by an anti-corruption campaign in major coal-producing region Inner Mongolia, but she expects more domestic output this year amid promising demand with more new high-proficiency capacity coming online.

As of Feb. 2, $1 was equivalent to 6.46 yuan.