Homegrown Falls Short
July 2019
The month of June saw widespread thermal coal supply tightness throughout China, resulting in the price spread for domestic 5000 NAR products over exports from Australia to increase 29% to US$24.02 in June.

Beijing has been continuously trying to cap thermal coal mines production in a bid to reduce air pollution which has become a major problem across China, especially in the top coal producing regions. Moreover, China is trying to reduce the share of thermal coal in its energy mix, in an effort to meet its climate goals. China’s fight against pollution and CO2 emissions has resulted in domestic prices increasing as stockpiles have been declining.



Due to Australian cargoes facing delays at Chinese customs after a newly-implemented 30-to-40-day delays on Australian imports that came into force in January and February, domestic suppliers have been reluctant to import Australian coal, driving prices downward.

The significant increase in thermal coal prices for 2009–2011 led power utilities globally to seek lower cost alternatives in order to maintain positive cash margins. This resulted in the rise of the 5500kcal/kg NAR thermal coal product on the international market, possessing lower energy and higher volumes of deleterious material such as moisture, ash and sulphur compared to premium thermal coal. Two countries that produce such products are Australia and China, which are generally priced against benchmarks FOB Qinhuangdao and FOB Newcastle.



However, Australian thermal coal has a significant advantage over the Chinese one: Most Australian operations consistently produce export thermal coal with sulphur contents within the 0.5–0.6% range, making it desirable for key Asian markets such as Japan, where power utilities have more generally more stringent quality parameters. While some Chinese operations also produce lower energy thermal coals within these constraints, it is common for sulphur contents to exceed 0.8%. For example, China National’s 20Mtpa Antaibao mine in Shanxi province has produced a 5500 NAR thermal coal with total sulphur contents exceeding 1%.



Demand for thermal coal in China, which AME forecast will import 208.4Mt of the fuel this year, is expected to remain steady over the medium and long-term, as the share of thermal coal decreases slightly to 59% over the next few years. Australia also exports a significant amount of its thermal coal to Japan and South Korea, accounting for approximately 41% and 16% of total exports so far in Q1 2019, respectively, of which a minor amount is 5500kcal/kg coal.

Due to the strict parameters which are prevalent at Japanese power utilities, 5500 NAR thermal coal is predominately used as a blending product in order to minimise costs. In countries such as South Korea and Chinese Taipei, quality parameters are less stringent and therefore more scope exists for 5500 NAR thermal coals to be used as a primary power source. India is not a major consumer of either Chinese or Australian 5500 NAR thermal coal, as the country produces significant amounts of lower energy thermal coals domestically.