China coal ban puts steelmakers in quandary: Correction

Corrects Mongolia coking coal production details in fourth paragraph

Half a year after China imposed an informal ban on Australian coal imports, its steelmakers are still faced with the mammoth task of ensuring they have sufficient coking coal with the largest source of imports cut off. So far, they have fallen short.

China's January-February coking coal imports fell by 58pc to 6.3mn t in the absence of Australia's 10mn t from a year earlier.

Following the removal of Beijing's 25pc retaliatory tariffs on US coals in March last year, the US was a natural contender for fulfilling some of this shortfall. In the October 2020 to February 2021 period, China caught up with Brazil, the largest importer of US coking coal in recent years, importing 2.36mn t of coking coal from the US, a four-fold year-on-year increase, similar to Brazil's 2.35mn t in the same period, which was down 12.5pc on the year. In February, China imported 722,112t of US coking coal, the largest volume on record and nearly twice the volume of Brazil's imports that month.

Mongolia is the only producing country with coking coal shipments that come close to China's Australian import volumes. But China has limited its truck border crossings to control the spread of Covid-19. Russia and Canada, China's second and third-largest suppliers now, have ramped up exports significantly but have struggled with harsh winter weather and logistics, especially towards the end of 2020.

Steel producers in China, particularly the coastal mills in the south that use the largest amount of Australian coking coal, have been able to gradually reduce their dependence on Australian-origin coal since Beijing began limiting imports in 2018. But these mills still need to buy some imported coal regardless of price.

"We are still sourcing imports because of our location, while other mills in China and even those who used to buy imports have been changing up their blends to include more domestic coal," a coastal south China steel producer said. "It is definitely possible, just that some mills are more resistant than others."

Other coal buyers have countered that the shortage of coking coal is more perceived than real because the industry had built up inventories ahead of the ban.

"Starting from last year, many mills have in fact been stocking up their inventories as much as they can because of the ban on Australian coal," a major coke producer said. "So actual inventory levels before the lunar new year holidays were in fact much higher compared to previous years."

China's domestic production meets 90pc of its coking coal requirements.

Beijing has shown no sign of relenting on its ban, which also includes thermal coal. Its national energy administration said last month that there is no discernible shortage of coal and the country can meet its energy requirements.

Limited alternatives

Chinese steel producers are not the only ones feeling the sting from the import ban. Australian coking coal producers locked into fixed take or pay infrastructure contracts at the port and rail are forced to continue shipping premium coals at a loss in the absence of Chinese buyers.

The combined cost of these contracts range as high as 25.22 Australian dollar/t ($19.26/t) at the Wiggins Island Coal Export Terminal (Wicet) at Gladstone to A$11.96/t at the Dalrymple Bay Coal Terminal (DBCT) at Mackay for central Bowen basin coking coal producers, according to Dalrymple Bay Infrastructure, which owns DBCT. Fob Australia trades for premium hard coking coal in the first quarter of this year totalled 3.17mn t, down from 4.2mn t in the fourth quarter of 2021 and the highest since 2017, when the full impact of China's restrictions were felt by Australian mining firms.

More coking coal cargoes were understood to have been diverted by Australian mining companies to alternative buyers in north Asia and Brazil on a term basis in the second quarter. The volume of fob Australian trades were low in January and February, totalling 1.27mn t compared to 1.9mn t in March, this is likely to have been due to Australian mining firms previously hoping that China would ease restrictions ahead of the peak stockpiling season before the lunar new year holiday. This coincided with the Argus Australian premium low-volatile index falling to a year-to-date low of $103.40/t fob Australia, while the US low-vol stood at $159/t fob Hampton Roads in mid-January, when March cargoes were being discussed.

Although European mills have since the second half of last year been approached by traders seeking to swap their US low-vol coals for Australian low-vol coals on attractive terms, appetite in Europe is limited for Panamax or even Capesize shipments. Larger European mills include Australian low-vol coals in their blends and are in the position to receive Panamax or larger shipments of coal, but smaller steelmakers in Europe tend to have a greater reliance on high-volatile US and Baltic coals and PCI. A major European mill also entered the market earlier this year to resell fob Australian cargoes at large margins.

The ability to ship to China has also led to a deviation in the US low-vol market in terms of price expectations between mining firms with the capacity to load a full Panamax and firms with smaller output. Large low-vol producers that have traditionally focused on the north Asia markets such as Warrior Met Coal have benefited from the surge in China cfr prices this year, while producers with smaller volumes to offer are met with lower workable prices from European coke makers, for example, leaving a gap of $7-10/t between prices of LVs offered to China and to Europe, even after taking brand differentials into consideration.

Brazil has become a key destination for Australian coals but Brazilian mills tend to switch quickly between Australian and US low-vol coals depending on prices, say mining companies. Brazil imported 2.29mn t of coking coal from Australia in the October 2020-February 2021 period, up 61.5pc year on year. Australian cargoes typically have a voyage time of 40 days to Brazil, nearly twice the length of US east coast loadings. But an estimated cfr Praia Mole price of$127.50/ttoday for an Australian premium low-vol coal based on estimated freight of $15/t remains significantly more attractive than the Argus-assessed $152.75/t fob Hampton Roads for US low-vol coals, particularly with delays experienced for certain loadings at Norfolk currently.

There are also limitations to Brazilian appetite for Australian low vols even in a low-price environment. "We have too much premium low-vol coal in our stocks at the moment and it is putting pressure on our blends in a tight market for US high vols," said one Brazilian mill that typically burns a mixture of pet coke, Colombian mid-vol coals, low vols and US high vols.

By Rou Urn Lee and Siew Hua Seah