Unlike iron ore, where China is by far the dominant customer, demand for metallurgical coal is far more widely spread. China, Japan, the European Union and India each absorb about 20 per cent of seaborne supply.
While, as occurred with energy coal and other Australian products, the Chinese bans created initial shocks and disruptions as China’s demand completely evaporated – for months cargoes of Australian coal sat fruitlessly off China’s coast and prices dived – China appears to have miscalculated how quickly the producers would respond and how significantly its bans would rebound on its own industries.
For the moment, at least, while some of the exports China has targeted haven’t had the ability to adjust as easily or seen their markets recover in the same way as energy and metallurgical coal, the Chinese sanctions are hurting their companies and economy more than Australia’s.
Having lost China as a customer the Australian coal producers scrambled to find new customers, perversely aided by the slump in the prices. Buyers in Japan, India, the EU and South Korea, presented with high-quality coal at bargain prices, grabbed the opportunity.
Having shut off access to Australian coal, China had to find supply elsewhere. For metallurgical coal it turned to North America, Russia, South Africa and Mongolia.
Unsurprisingly, given the dominance of Australian supply in the metallurgical coal market in particular and the extra distance and costs involved in shipping North American coal to China relative to Australian coal, that caused some significant dislocations in a market already being impacted by the first half boom in China’s steel production.
China’s domestic prices for coking coal began spiking sharply even as the cost of its imports was rising.
Some production shutdowns in Australia when the initial loss of China as a customer and the price plunge forced the producers into losses, curtailing supply while COVID-related border closures that impacted access to Mongolian production and mine closures in China itself flowing from safety and environmental concern were other influences on a price for China’s own supply that surged quite dramatically. It’s now solidly over $US400 a tonne, having peaked at $US440 a tonne.
The price rise for the Australian metallurgical coal producers hasn’t been as dramatic but is above $US220 a tonne – it has more than doubled since the start of the year – dragged up by the prices China has been forced to pay to replace the Australian volumes with higher cost and lower quality products.
Australian coking coals are premium products, helping to maximise production yields and minimise the environmental effects. The redirection of Australian exports at prices way below those China is paying is good for China’s competitors in Asia and Europe and not so good for its own mills.
China has imposed price caps on its domestic coal producers and the big second-half cutbacks to steel production (if the mills do fully comply with Beijing’s directive) will also have an impact on demand for coal.
The outsized role of the Australian producers in the market for metallurgical coal, the premium quality of their products, the proximity of Australian supply to the key Asian markets and China’s own need for high-quality coal ought, however, to provide a relatively elevated floor under prices.
The super-premium prices China is paying are the unintended consequences of its efforts to punish Australia for the temerity of our leaders asking for proper investigations of the origins of the pandemic, criticising China’s treatment of Uighurs and its actions in Hong Kong.
For the moment, at least, while some of the exports China has targeted haven’t had the ability to adjust as easily or seen their markets recover in the same way as energy and metallurgical coal, the Chinese sanctions are hurting its companies and economy more than Australia’s.
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