The 74 vessels holding Australian coal are still floating off Chinese ports, as Beijing refuses to blink and Australian producers have no option but to redirect this inventory to alternative, but less lucrative, markets.
Thus Australia’s coal producers have become collateral damage in a diplomatic war between the two countries that has turned into a slugfest.
For the past year China’s bans and restrictions on numerous Australian products and commodities, including barley, wine and lobsters have taken centre stage.
But in recent weeks the attempts by the Australian government to seek retribution are looking increasingly like an own goal.
Australia’s response – restricting Chinese investment in various sectors, including infrastructure, communications, agriculture and construction – has worsened the already toxic relationship.
This week’s revelation that treasurer Josh Frydenberg blocked the sale of construction company Probuild to a Chinese buyer has backed up the view that capital inflows from China have unofficially been banned by the Australian government.
This will have wide reaching implications for Australian companies looking for capital or wishing to sell businesses. At the very least it will remove some competitive tension for asset sales.
The Australian government has now moved beyond restricting Chinese interests from owning assets in sensitive industries to an unofficial choke on investment.
And with each escalation from either side, a walk back to a truce will become harder.
Thus Australian exporters to China will no longer be able to wait it out in the hope that bans will be lifted. Alternative markets must be found to replace China in the medium and potentially longer term.
The most economically damaging export ban for Australia is coal – a market worth around $14 billion a year.
Whitehaven boss Paul Flynn said on Thursday that the China ban was prompting a realignment of international markets and trade flows for coal.
China has had to replace product previously acquired from Australia with locally mined coal and more expensive imports from Russia, Indonesia and South Africa.
This is despite anecdotal reports that Chinese steelmaking companies have unsuccessfully lobbied their own government to allow imports of high-quality coal from Australia.
Specialist research firm Wood Mackenzie noted in December that China’s preparedness to pay as much as $US180 ($232) a tonne for hard coking [metallurgical] coal illustrated the difficulty it was having replacing Australian imports.
The implications of an ongoing ban for metallurgical coal (used in steel making) are more serious than for thermal coal (used for electricity) because the volume of impacted metallurgical coal is over 10 per cent of the seaborne market, while for thermal coal the volume is less than 5 per cent, according to Wood Mackenzie.
The absence of the China market for Australian metallurgical coal has slashed prices for our local producers.
They are now forced to divert metallurgical coal to other Asian markets whose demand was negatively affected last year by the pandemic and that is only now beginning to lift.
Thermal coal prices have now risen from their August lows, as some Australian producers have found markets in India, Pakistan and the Middle East.
While new suppliers will benefit from fresh China demand it has come at a significant cost to Australia and China.
Elizabeth Knight comments on companies, markets and the economy.