What if China stops taking Australia’s coal?

Chinese state-owned media appeared to confirm a ban on imports of Australian coal this week.

Australian officials are now trying to figure out how serious the threat is, and its implications.

If China stops taking Australia’s coal, will other countries fill the gap? Could Japan, India and South Korea?

What’s happened?
A state-owned tabloid in China, The Global Times, this week reported China’s top economic planner was allowing the country’s power plants to import coal without clearance restrictions from several countries “except for Australia.”

It appears to confirm that the unofficial ban China placed on Australian coal imports in recent months has become official.

It’s part of rapidly escalating trade tensions that have seen China slap restrictions on a range of Australian imported goods including barley, wine, meat, and lobster.

How much metallurgical coal is involved?

Around 780 kilograms of metallurgical coal is needed to make one tonne of steel in a blast furnace.

Australia is the world’s biggest exporter of metallurgical coal, accounting for 55 per cent of the world’s supply in 2019 (with Canada in second, at 15 per cent).

In 2019, Australia exported $41.2 billion worth of metallurgical coal, with most going to India.

India accounted for 24.6 per cent of Australia’s exports, worth $10.1 billion, while China accounted for 23.6 per cent, worth $9.7 billion.

What impact will this have on the Elk Valley?

Demand for Elk Valley coal will increase as China looks for new supplies and the price could stabilize if Australia successfully moves it’s product to other markets.

“Aussie coal producers might be looking at other destinations for coal, such as Japan or India but, given the quantum of impact, they will likely trim production as well,” Abhinav Gupta, a research analyst at Braemar ACM Shipbroking, told Bloomberg.

China is ‘seeking to both punish Australia for taking certain decisions and warn off other countries from adopting similar policies’, John Lee, a former national security adviser to Canberra, says.

‘Beijing is trying to make an example of Australia,’ international relations expert Pichamon Yeophantong says.

The dispute has sparked a more than 25 per cent drop in coking coal prices even as iron ore — the other ingredient needed to make steel — has soared to six-year highs.

If the coking coal ban persists it could have far-reaching implications for the market, analysts say, changing trade flows and possibly the benchmark pricing system — if producers shift to using Indian or Chinese import prices as their yardstick.

Unlike most commodities, China is relatively self-sufficient in coking coal, with domestic mines supplying about 80 percent of its needs. But such is the scale of its steel industry that it still imports about 70m tonnes a year of the steelmaking ingredient, around 30m-40m of which comes from Australia and producers including BHP.

Traders expect producers outside Australia will try to take advantage of high domestic prices to ship more tonnes to China.

Teck Resources said this week it was targeting coking coal sales of 7.5m tonnes to China next year, up from 2.5m tonnes in 2019. “We aim to sell these tonnes at CFR China pricing,” Teck said.

The irony here is that Canada and China relations are also at an all time low and China has become very unpredictable. Will the Elk Valley’s coal be China’s next trade ban?

Source: ABC News