Nobody yet is quite sure whether Australia and China’s spat over coking coal imports will eventually turn out to be a case of bad politics making good economics or bad economic sense making for good politics.
While politics between China and Australia is part of the reason for the former to have completely banned the import of coal from the latter, it has led to churn in the Asian the rest of the global coal markets.
With China not lifting the ban despite it being a new year (as some had anticipated), the volatility in the markets is likely to continue.
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China’s coking coal import ban
In the last quarter of 2020, a verbal ban by China to halt all Australian coke was followed up with a formal one.
Coking coal import prices then declined by 24% from early-October to mid-December. Why? Because market players expected a glut in the global coal market in the medium term.
This game of Chinese checkers is not relegated to only the two players, China and Australia.
India, Japan, and a host of other Asian and Southeast Asian nations have started to feel the after-effects.
Of late, according to this report by CNBC, major Chinese cities have started suffering power cuts because of the Chinese authorities limiting power usage while citing a shortage of coal.
What’s more, Chinese coal prices have shot up due to the reported shortage.
In India, the spat may be a boon for its steelmakers because of the softening of coal prices. A report by India Ratings and Research agreed that the indefinite Chinese ban would help keep import prices for India volatile over the near term.
Prices of Australia-origin coking coal imports have remained subdued up to mid-December, providing a respite to India’s domestic steel players.
According to the Financial Express, the earnings of Indian steel manufacturers, such as JSW Steel, and others are likely to increase in the next few months, as coking coal continues to be available far cheaper because of the oversupply of Australian coal in foreign markets. Softer coking coal prices are likely to directly support EBITDA per ton accretion in fiscal year 2021 for companies using the blast furnace route.
Coking coal import prices fell to a 52-month low by mid-November 2020, falling 27%.
Incidentally, China and Australia are the largest coking coal trade partners in the world. China’s imports account for 40% of overall imports. Meanwhile, Australia’s exports make up 65% of the global total.
The ban on Australian coal imports persists despite a harsh Chinese winter, the Australian Financial Review reported.
China’s protectionist policy had also ensured coal prices inside China now being higher than outside the country. In fact, in early December the Chinese government stopped the nation’s four big coal price indexes from publishing daily prices.
According to a report by S&P Platts, in the first quarter of this year alone, Australia would lose out on sales of up to 32 metric tons of thermal coal that would have gone to China.
Coking coal market losses
Australia seems to be losing out on other markets, too.
Japan, also a buyer of Australian coke, had already announced earlier that it would retire about 100 of its most inefficient coal plants and invest in renewable energy. The move came as part of Japan’s plan to be carbon neutral by 2050.
South Korea and Taiwan are other buyers in Australia’s top five. They have also announced sharper targets for emissions reduction, the aforementioned report noted.
But observers and experts in Australia have different opinions on the outcome of China’s ban.
One batch thinks Australia’s continued dependence on a fossil fuel needs to change. As such, the ban could change.
Australia’s reliance on coal traces back over 200 years, making it the center of the country’s politics. Last year, for example, Australia exported about U.S. $50 billion in coal.
The view from Australia
However, Australia’s conservative government does not seem to be fazed by the ban.
While it may have, for now, lost its biggest coke market, it banks on nations like India and Japan where, despite assurances to the contrary, new coal-fired plants are coming onstream.
In these countries, there clearly is no sign of a transition away from coal. But it is clear that the country has now a struggle on its hands. Australia will have to compete in the international markets with other exporters, like Indonesia and South Africa.
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