China’s crackdown on Australian coal imports sends prices sliding

Fraying relations between Australia and China have 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.

China last month placed what has been seen as an unofficial ban on imports of coal from Australia, following a sharp deterioration in diplomatic relations after Canberra called for an inquiry into the origins of the Covid-19 pandemic. On Friday, Beijing followed up with tariffs on Australian wine.

In a sign of China’s influence over commodity prices, since the coal ban came into effect the price of premium Australia low-volatility coking coal — the current industry benchmark — has dropped from $138.50 a tonne to $101.25.

Julien Hall, Asia metals pricing director at S&P Global Platts, said October was a “big tipping point” for the market as its recovery from the demand hit caused by the pandemic was put on hold by Beijing’s action.
“The need to find other destinations [for Australian cargoes] led to a rapid fall in the price,” said Mr Hall.

Over the same period, iron ore has climbed about 8 per cent to a six-year high above $130 a tonne on the back of strong buying by China, where mills have been cranking out record amounts of steel.

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 per cent of its needs. But such is the scale of its steel industry that it still imports about 300m tonnes a year of the steelmaking ingredient, around 40m of which comes from Australia and producers including BHP.

Colin Hamilton, analyst at BMO Capital Markets, said China’s import ban effectively meant that Australian coal was looking for a new home. “But the rest of the world has not been strong enough to absorb that material,” he added.

Traders reckon up to 7m tonnes of Australian exports — both thermal and coking coal — are stuck outside Jingtang and Caofeidian, two ports in northern China.

In response to questions about Australian coal shipments, China’s foreign affairs ministry said this week that customs officials had “strengthened inspections” to “ensure environmental safety”.

There are three pricing tiers in the coking coal market. The first is the benchmark Australian prices, which are used for most long-term contracts. These are currently about $110 per tonne, including shipping costs. Traders fear the benchmark could lose relevance if the restrictions are not lifted soon and the price becomes detached from market fundamentals. “It’s questionable if it can remain a global benchmark,” said Mr Hall.

The second tier is China import prices. These are reflected through another premium low-volatility contract, which includes the cost of freight and carries the designation CFR. This price has jumped more than 14 per cent to $170 a tonne since the ban came into effect, as Chinese mills have turned to suppliers in the US, Canada and Russia. And finally there are domestic prices in China, which S&P Global Platts estimates are at $196 a tonne.

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

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