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Chinese ban on Australian coal hits home amid confusion over Beijing's orders

Traders in China are said to be "desperate" to sell their Australian coal cargoes back into the market since S&P Global Platts revealed Oct. 9 that China sought to restrict coal imports from Australia.

However, experts suggest it will not be easy to wean Chinese users off Australia's high-quality coking coal amid confusion on the ground in Asia over Beijing's instructions.

China's state-owned utilities and steel mills received verbal notice from customs to stop importing Australian thermal and coking coal "with immediate effect," Platts reported, citing several sources close to the matter.

These claims were echoed in other media, and Platts cited some state-owned utilities as saying they have limited Australian coal imports, following a similar announcement in May.

Although Chinese local authorities reportedly did not provide state-owned end users with reasons for the move, sources told Platts the restriction followed higher Australian coal imports and political tension between two countries.

High-ash Australian coal prices have dropped at a rate of US$2/t to US$3/t each day since Oct. 9 as traders in China have been "very cautious" and "desperate to sell" their Australian cargoes into the market, the sources added.

China's state-owned utilities Huaneng Power International Inc. and Huadian Power International Corporation Ltd. canceled three vessels of high-ash Australian thermal coal on Oct. 1 after receiving a directive via verbal notice from local authorities to stop importing Australian coal, sources said.

Huaneng canceled two 75,000-tonne Panamax vessels of 5,500 kilocalorie-per-kilogram net as received Australian coal arriving from October to November in a buy-tender previously awarded at about US$35/t on a free on board netback basis, sources told Platts.

A source close to the matter said it was "good that it was canceled as it was getting harder to source for this grade previously" at the awarded US$35/t FOB rate as the market was "filled with Chinese traders taking position for cargoes loading" toward year-end.

Unclear messaging

ANZ Research said in an Oct. 13 note that its own channel checks so far "suggest a more confusing situation on the ground. While it appears some Chinese buyers have received the verbal ban, there have been others that have not heard a thing ... and it doesn't appear to be directed entirely at Australia, with other import sources also coming under the directive."

"It appears to be directed at lower quality coking coals, such as [pulverized coal injection] and semi-soft. Demand for premium hard coking coal remains strong. This marries with China's own domestic coking coal industry, where lower quality coking coal is in plentiful supply, while hard coking coal is relatively limited," ANZ said.

The bank's analysts said Chinese authorities have been adjusting import quotas "for some time" to balance domestic and international coal consumption. The most recent case occurred in late 2018 and early 2019, when restrictions were placed on imports in three major provinces due to aggressive restocking prior to winter as key state-owned power plants' inventories were at record highs.

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ANZ said that though China's domestically sourced thermal coal accounts for 95% of consumption, importing 225 million tonnes in 2019, the Asian giant still relies on international markets for premium hard coking coal, with imports of Australian coking coal rising 37% year over year from January to August.

S&P Global Market Intelligence data shows Australian coal exports to China have been rising since at least 2015, and ANZ estimates that about 36% of Australia's coking coal exports have ended up in China in 2020, up from 28% in 2019, reflecting Australia's growing market share.

All of this suggests the latest move is about supporting China's domestic market, according to ANZ, which does not see any medium-term implications but still expects the restrictions to weigh on premium hard coking coal prices, with cargoes "taking a long time to be sold amid the confusion, with buyers treading carefully."

Australian dominance

JPMorgan analysts said in an Oct. 13 note that Australia's typically high-quality coking coal is "not as easily replaced by alternative sources," with Platts reporting that Australian metallurgical coal is the largest seaborne origin for China.

In 2019, Australian metallurgical coal accounted for 43% of total Chinese imports a predominant market share that shows the growing needs of China's steelmaking sector for higher-quality coking coal with lower grades of sulfur and ash, according to Platts.

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China's coking coal import demand has already seen a declining trend in the spot market since May and Platts Premium Low Volume benchmark prices have come under pressure since the week starting Oct. 5.

Market participants anticipate an oversupplied market globally on reduced Chinese demand, with destinations outside China unable to absorb all the excess supplies.

Steelmakers in China will feel the challenges of seeking alternative resources if the ban stays in place for a period of time due to the lower quality of coking coal produced by China and Mongolia — another major source for the domestic sector, said Feng Dongbin, a senior manager with Shanxi-based consultancy Fenwei Energy Information Services.

However, Feng expects it will be easier for China to find alternative thermal coal sources, such as from Indonesia, Russia and its own Inner Mongolia region.

JPMorgan analysts noted that while coal earnings for BHP Group, South32 Ltd. and Whitehaven Coal Ltd. represent 4%, 14% and 100% of the analysts' fiscal 2021 forecasts, respectively, BHP's coal division appears to have more volume exposure to China than the other two Australian companies.

While India was BHP's largest metallurgical coal customer in 2019, China has become the largest customer in 2020 due to COVID-19-related shutdowns across the rest of the world, and JPMorgan said some pressure on total coking coal import requirements could emerge due to increasing mine production in China.

China is BHP's largest thermal coal market for product from the Mt Arthur mine in New South Wales, the analysts added.

S&P Global Platts and S&P Global Market Intelligence are owned by S&P Global Inc.