Australian coal producers are diversifying sales to non-traditional markets in the face of an informal ban by China that is redirecting global trade flows. But there are concerns over the sustainability of this approach in the longer term.
Informal restrictions have been imposed by China on Australian coal imports since April, amid rising diplomatic and trade tensions over Canberra's calls for an investigation into the origins of Covid-19. The curbs have sent Australian high-ash coal prices tumbling to around all-time lows.
Rock-bottom prices for Australian high-ash NAR 5,500 kcal/kg coal have attracted buying interest from many non-traditional markets, including India, Myanmar (Burma), Cambodia, Pakistan, Qatar and several other Middle East countries.But this has failed to stimulate meaningful price gains as most of these buyers were attracted only because this coal had become cheaper than the alternatives on a heat-adjusted basis.
Most of these non-traditional markets, such as India, have other sources of short-haul coal and are ready to switch back to their usual suppliers if Australian prices rise significantly. "As a result, we do not expect the large influx of cargoes from Australia into India to last over the longer term," an Indian trader told Argus today. But he said he had never seen as many cargoes of Australian NAR 5,000-5,500 kcal/kg flow into India before.
Some Australian coal producers are also selling more NAR 5,500 kcal/kg coal to other markets, such as South Korea, by blending it with NAR 6,000 kcal/kg Australian coal. But the blending is typically done once a seller has won a tender to sell or secured a commitment from buyers in countries such as South Korea and Taiwan, which often favour NAR 5,700-5,800 kcal/kg coal with a maximum of 16-17pc ash.
The spread between the NAR 5,500 kcal/kg and NAR 6,000 Australian grades widened to over $20/ton 13 November. This disparity is further encouraging some Australian producers to blend NAR 5,500 kcal/kg coal with higher calorific value material for better margins in northeast Asian markets outside China.
Diversification risks
India has accounted for the bulk of the non-China demand for Australian high-ash coal in recent months, spurred by a spike in petroleum coke prices that pushed many Indian cement manufacturers to switch to coal as a fuel for their kilns. Most Indian steel and sponge iron manufacturers continue to draw on South African coal, while Indian power plants rarely buy much Australian NAR 5,500 kcal/kg coal unless they can blend it with low-ash, low-sulphur NAR 3,800 kcal/kg (GAR 4,200) coal from Indonesia.
But the sustainability of Indian demand for Australian high-ash coal beyond the first quarter of 2021 is uncertain. This is because the spike in prices of petroleum coke has been caused by reduced global refinery runs as the Covid-19 outbreak reduced oil product demand. A Covid-19 vaccine, which may be available by early next year, could help to spur demand if it is distributed widely and quickly.
A fall in petroleum coke prices in the event of increased availability next year could prompt Indian cement producers to switch away from coal, which is usually more expensive than coke by at least 10-15pc. A switch away from coal by Indian cements could remove a key source of current demand for Australian high-ash coal, encouraging other non-China markets to bid even less for Australian coal and forcing Australian producers to cut output further.
Chinese demand
Although China has turned recently to Russian, South African and Colombian coal as a replacement for Australian coal, the total purchases heading into its winter have still been relatively limited compared with typical coal imports at this time of year. This is because many Chinese buyers are concerned about these cargoes meeting domestic fluorine requirements.
Some Chinese buyers are deterred by significantly higher prices of South African and Colombian coal compared with similar heat Australian high-ash material, in addition to costlier freight routes. But a tightly supplied domestic market has driven some Chinese buyers to accept limited cargoes of NAR 5,500 kcal/kg non-Australian seaborne material, albeit reluctantly.
In a rare move, at least six cargoes of Colombian coal were sold between 4-13 November for delivery to China during the winter. Prices were around $65/t cfr, which market participants said netted back to some Colombian ports at $49-$51/t fob. But the Colombian markets remain characterised by supply constraints, with the Sintracarbon union's strike at producer Cerrajon heading into its 12th week.
Supplies of Russian coal to China are tightening as winter approaches and some Russian ports can ice up for several months. This, and Colombian supply constraints, may force Chinese buyers back to cheaper Australian coal, which has the best brand recognition in China among imported coal types.
The ban on Australian product has pushed China's domestic spot coal prices of NAR 5,500 kcal/kg well above the government set-upper limit of 600 yuan/t ($90.82/t). Argus last assessed the Chinese spot market for NAR 5,500 kcal/kg coal at $92.30 fob Qinhuangdao port on 13 November. Australian NAR 5,500 kcal/kg coal was at $37.63/t fob Newcastle, while freight on the Newcastle to north and south China routes has been close to $10/t for Capesize vessels.
Chinese coastal utilities, which rely heavily on seaborne coal imports, have been hit hardest by strong domestic prices and curbs on cheaper Australian coal. Most of China's important industries are in the densely populated coastal regions, where tight electricity supplies this winter could reverberate through the economy.
Canberra "knows what it needs to do to improve this relationship", China's assistant minister of commerce said last week after a call by a spokesperson from Beijing's ministry of foreign affairs on Australia to "reflect" on the two countries' trade relations. Many have interpreted these comments as extensions of Beijing's "wolf warrior" diplomacy.But they could instead be regarded as face-saving pleas for Australia-China relations to normalise. Beijing urgently needs Australian coal this winter and over the longer term. It also needs to be assured that no face will be lost when it relaxes any import restrictions against Australia.
