Market Watch: China goes ‘cold’ on coal

The biggest market mover of the week wasn’t the release of Australia’s strong January employment numbers or ‘Super Thursday’ which saw around 140 companies report earnings. Rather, itwas unconfirmed reports that China may have placed a ban on Australian seaborne coal.

The impact was felt by both currency and coal producers, particularly those producing low-grade thermal coal – that is, Whitehaven Coal and New Hope Corporation.

Going granular

For the past 4-6 months, China’s most northern ports have had a ‘go-slow’ customs policy, with some ships having to wait up to 45 days to clear the port authorities.

Although this is an obstruction to trade, Australian coal still reached the port. This new development suggests customs has halted processing completely. If true, this will create a bottleneck in seaborne coal and a shipment bottleneck over the forward period.

The question becomes, if true, how big an impact will this have on the Australian coal market?

If we look at the main northern port in China, in Dalian, here are the most recent stats around coal import into it.

The 2018 numbers haven’t been released yet, but according to the Dalian Port Authority, Dalian imported 11.9 megatons of coal in 2017. This is roughly 1% of global seaborne trade.

Looking at Australian coal data, Australia last year exported around 383mt of coal, or 29% of global seaborne trade. Of this 383mt, 90mt was exported to China as a whole.

Drilling down into Dalian specifically, 50% of its coal was sourced from Australia. Therefore, based on this, approximately 7% of Australia’s export to China could be affected.

The China issue is a 'could'

I say ‘could’ as all market reactions after the media reports have suggested a ‘ban’ isn’t necessarily the case.

If we look at the spot coking coal market, it actually rose in the 24 hours after the event. Thermal coal remained steady. As mentioned above, if a ban was in place and bottlenecking occurred, then prices should fall not rise.

Taking into consideration all the above, what is occurring seems to be just a further extension of the ‘go-slow’ policy rather than a direct trade restriction.

Another theory as to why China has slowed processing is the post-Chinese New Year surge in exports. January saw a 228% increase in coal supplies, inventory is up, and coal prices are still at 4-year highs. China may have gone cold on coal, but it appears a short-term issue rather than anything else.