February 2022
Australia’s ties with top trade partner China embittered in 2020 when Canberra publicly called for an enquiry into the origins of the coronavirus. Diplomatic retaliations have since followed, including a raft of trade measures imposed by China on Australian metallurgical coal exports.

In October 2020, China “found” coal imports failed to meet environmental standards amid stalled Australian shipments, with the share of China’s coal imports from Australia falling to 26% in that month. 

Previously, in February 2020, Australia banned people arriving from China and later closed its borders and imposed strict curbs on public movements. Later in the year, Australia added pressure on China over its handling of the novel coronavirus, questioning its transparency and demanding an international investigation into the origins of the virus and how it spread.

In the last quarter of 2020, Australia started investigating reports that China had verbally instructed buyers to avoid Australian coal supplies. The restrictions on Australian coal naturally represented a new opportunity for other producers in the region, particularly in East Asia and Northeast Asia, to satisfy China’s coal deficit.

 

 

However, imports from Mongolia, Russia and North America were not enough. In June 2021, Chinese factories began to report power outages and electricity shortages, resulting in most industrialized provinces such as Xinjiang, Qinghai, Jiangsu, Guangxi, and Guangdong facing severe power consumption problems.

On the other hand, customs authorities in Huangpu, south China put a quarterly limit on coal imports in an effort to curb the country's seaborne coal demand in the June quarter of 2021. Local authorities introduced a limit of around 3Mt coal imports in the respective quarter, after imports in the March quarter reached 6-7Mt, substantially more than in the same period last year.

 

The Winners

China’s steel mills consume more than 700Mt of coal a year and obtain around 88% of it from domestic mines. As a result, imports are crucial not only for the quantity needed, but for both their quality and flexibility in meeting demand.

Throughout 2021, China’s domestic supplies have also been troubled. A series of fatal accidents has forced the closure of many Chinese coal mines. In the third quarter of 2021, coal mines in Shanxi province were ordered to close for a month after a worker was killed. This followed the closure of 22 mines in the province after three mining accidents in June. Similar closures due to safety reasons were also ordered in Hebei and Henan provinces.

The unofficial ban by the Chinese government on Australian coal since 2020 impacted global trade flows of the bulk commodity, fully diversifying the structure for China's coal supply in 2021. With domestic production struggling, export volumes to China from non-Australian origins, including Canada, Russia, Indonesia and the U.S., have increased across different grades of metallurgical coal.

Mongolian coal miners were set to be the major beneficiaries due to the quality of Mongolian coal. However, the resurgence of COVID-19 cases has affected the Chinese-Mongolian border causing intermittent closures and distressing export volumes.

Given Mongolia’s abundance of coal and China’s heavy manufacturing industry, Mongolia makes an important trade partner. As the global coal prices remain volatile, steep transportation costs and tariffs are a major dealbreaker for the Chinese, further incentivizing sourcing coal closer to home. Mongolia coal exports will continue to be the country’s primary source of investment and business, given Mongolia’s slow economic growth.

Russia is negotiating to boost coal supplies to China. Potential annual growth is expected to reach 50Mt in a favourable case scenario, subject to the increase in railway carrying capacity. Russian supply accounts for 19% of the total coking coal imported by China in the last year. In 2021, China’s imports from Russia drastically increased by 59.6% year on year.

The US has also become a key supplier for China due to the ongoing trade conflict between Beijing and Canberra. In 2021, China imported nearly 10.25Mt of hard coking coal from the North American, more than the previous four years combined. This represents an increment of 990% compared to the actual volume imported in 2020.

 

Ease at Sight

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 China lift the ban. China imported 55.55Mt of coking coal last year, down by 23.5% from 2020. Even though demand for non-Australian seaborne coal imports was strong, it still could not make up for the gap left by Australian and Mongolian coal imports.

The limited supply supported a dramatic increase in China’s prices, which dragged Australian prices higher. China’s steel mills have been able to pass the increased costs of raw materials on to their customers. With the Chinese steel industry under orders to keep production under 1.06 billion tonnes produced last year, there’s competition among customers to secure supplies.

In October 2021, Chinese port authorities informed mills and trading firms, which hold Australian coal that has been discharged at the ports, that they would start to clear the coal. The main goal of the discharge from vessels and cleared through customs, was to boost thermal coal supply for winter heating demand, but also increment coking coal supply.

After registering imports of 0.778Mt of Australian coal in October 2021, China has again allowed to pass 2.67Mt of Australian coking coal loaded on the coal transport vessels through customs clearance in November 2021. However, the amount registered for the month does not constitute newly contracted coal, but the release of coal transport vessels that have been waiting in the offing of the ports since the Chinese Government unofficially banned the import of the Australian coal

Steel mills in north, northeast and east China confirmed they received notice from relevant authorities that their consignments will be allowed for release. However, only cargoes that were recorded in the customs system prior to October 2020 were allowed for clearance. The release of the coal was linked to China's efforts to alleviate power shortages before the winter season. The priority on thermal coal supply has limited the relief for steelmakers.

Australia is expected to continue to benefit from the growing Indian demand for Australian better-priced coal. Buyers expect India’s buying spree of Australian coal to last into next year due to its price and quality.