China banning Australian coal imports might be one of the most peculiar commodity stories of 2021. At a time when commodity prices are climbing, Chinese authorities decided to drop Australian coal, leading to a surge in worse-quality alternatives just as regional demand peaks.
Meanwhile, China’s aim of punishing Australia for calling for an investigation into the origins of Covid-19 has largely failed as Australian producers simply rerouted their extremely polluting cargoes towards India.
China, on the other hand, was forced to buy increasing amounts of Indonesian and Russian coal to accommodate domestic demand, triggering a more than 25% price hike compared to January levels.
China is more or less self-sufficient in coking coal yet needs substantial amounts of thermal coal for its vast metallurgical industry. Technically, China has a plethora of options to choose from.
Adjacent coal-rich Mongolia might have been one of the best and cheapest options, but the closed border hinders larger trade volumes.
Thus, Indonesia emerged as the prime supplier of low-calorific value coal, with imports into China hitting an all-time high of 15.9 million tons in January.
As heavy rainfall and the onset of Ramadan hindered Indonesia’s exporting potential, the United States took the baton, surging from minuscule export volumes to 1.6 million tons this March.
Increasing Russian flows to China became the latest trend in the Asia Pacific, riding high on strong political support from Moscow.
It should not come as a surprise that Russian coal producers latched onto the opportunity at hand. Aggregate Chinese imports of Russian coal in June 2021 totaled 4.04 million tons, almost 20% higher than the previous all-time high recorded in June 2020.
In a sense, Russia was preparing for such an event to take place as it had extended the transportation capacities of Eastern-Siberian railways, including but not limited to the Baikal-Amur and Transsiberian Railway networks.
Several major coal mines have Chinese co-owners and co-investors such as the Elgaugol in Eastern Siberia which is configured to bring almost all of its output towards the southern neighbor.
Chinese authorities have also introduced a relaxation of import controls to speed up discharge operations and customs clearances, attesting its desperate need for more coal.
Under normal conditions, coal prices would be kept within a so-called green corridor, a pricing bandwidth of 500-580 CNY that suits both domestic producers as well as end-users.
Meanwhile, media reports indicate that India and Russia are on the verge of signing a monster deal that would see the former securing some 40 million tons per year of coking coal.
The deal seemingly has the full support of Delhi political elites, despite India having relatively little experience with Russian thermal coal. Tata Steel signed its trial agreement only last year and the overall volume this year remains far from ground-breaking.
At the same time, the logic behind it is fairly straightforward as Indian buyers seek to get rid of their dependence on Australian supplies, especially given that they tend to be disrupted by massive flooding.
This year’s floods in March effectively cut off the production sites in New South Wales from the main export terminal in Newcastle, so India’s preoccupation with supply security is entirely understandable.
Oil Price.com / ABC Flash Point Coal News 2021.