How long can Beijing keep banning Australian supply?

China’s coal supply looks to remain tight and prices will stay elevated in the next six months as the country’s own production – coupled with curtailed imports such as those from Australia – will be unable to meet China’s rising demand for the raw material, according to analysts.

And that demand is raising questions about how long China can afford to continue banning coal from Australia.

Even as China’s steel production has cooled down in the past two months, the price of coking coal – which is mixed with iron ore to make steel – has remained relatively high.

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For instance, it exceeded 4,000 yuan (US$620) per tonne in some parts of coal hub Shanxi province last week – a surge of more than 45 per cent since the beginning of August, according to Kaiyuan Securities.

Chinese producers usually start to hoard coal from mid-October, but given that the prices have been rising recently, they will start to hoard earlier this year

And the price of thermal coal, which is used to generate electricity, hit a record last week amid power restrictions in Guangdong, Yunnan, Jiangxi and Hunan provinces.

Thermal coal prices, which had been rising since May 2020, hit a 10-year high in July.

Buoyed by robust industrial activity and strong demand from households, China’s total electricity consumption rose 15.6 per cent in the first seven months of the year, with 16 provinces exceeding the national average, according to the National Development and Reform Commission (NDRC), China’s top economic planner.

According to Li Rong, an analyst at Cinda Securities, this means that China’s total annual consumption of thermal coal – which is currently about 3 billion tonnes, with roughly 2.7 billion sourced domestically and the rest imported – is on track to increase by about 10 per cent for the whole year. If that figure holds up, it would require China to source an additional 300 million tonnes of thermal coal to meet demand.

As a result, Chinese authorities have moved to boost national coal reserves and accelerated the approval of land-use rights for open-pit mines in Inner Mongolia, China’s biggest coal producer. These mines had previously been suspended due to restricted access to land.

Thirty-six open-pit mines in the autonomous region have renewed land approvals since late August, and land approvals will be granted to mines with an annual capacity of nearly 50 million tonnes in mid-September, according to data published by the state-run Economic Information Daily.

Over the past year, our coal exports to China have fallen by around 30 million tonnes. But our coal exports to the rest of the world have risen by around 28 million tonnes

The monthly output of existing mines in Inner Mongolia will eventually increase by more than 7 million tonnes, but it will take some time to get those operations running at full capacity, the newspaper reported.

The NDRC also said new projects approved in the first half of the year will add 140 million tonnes of coal a year, while projects approved in the second half of the year will add an additional 110 million tonnes. But by Li’s estimation, this expansion process will take two to three years.

The Chinese government has also urged coal-mining companies to stop hoarding at ports, to ensure a steady coal supply. Last month, Inner Mongolia’s energy administration even asked local authorities to “launch an investigation” into the price surges in some mines.

“I don’t think coal prices will drop in the next six months, despite the government trying to curb the price surge, because the prices are always determined by demand and supply,” Li said. “Chinese producers usually start to hoard coal from mid-October, but given that the prices have been rising recently, they will start to hoard earlier this year.”

These factors invite the question of how much China’s ongoing ban on Australian coal is hurting itself.

Australia was one of China’s biggest suppliers of coking coal and a regular supplier of thermal coal until it was unofficially banned in October. Coal was Australia’s third-largest export to China after iron ore and LNG, making up more than 5 per cent of the A$250 billion (US$186 billion) two-way trade between the two major trading partners.

Since the conflict between the two countries escalated in April 2020 after Australia pushed for an international investigation into the origin of the coronavirus without diplomatically consulting China, Beijing has unofficially restricted imports of several Australian goods, including coal.

On Monday, in a keynote speech at the Australian National University’s Crawford Leadership forum, Australian Treasurer Josh Frydenberg said much of the coal that China did not want had been successfully redirected elsewhere.

“Of those goods targeted by trade actions, our total exports to China are estimated to have fallen by around A$5.4 billion over the year to the June quarter,” he said. “But over the same period, exports of those goods to the rest of the world have increased by A$4.4 billion.

“Australian coal, that otherwise would have gone to China, has found buyers in other markets including India, South Korea and Taiwan,” he added. “Over the past year, our coal exports to China have fallen by around 30 million tonnes. But our coal exports to the rest of the world have risen by around 28 million tonnes.

“Despite China’s wide-ranging actions, our economy has continued to perform very strongly.”

He reiterated that Australia remained interested in a relationship with China, but not before saying China had used its “economic weight as a source of political pressure”, and that it was “no secret that China has recently sought to target Australia’s economy”.

Frydenberg also said the Australian government would “remain steadfast in defending Australia’s sovereignty and core values” against economic coercion from China. It, however, did not not mean Canberra was “anti China” or “anti any other country”.

He warned that if trade disruptions continued, there would be costs to both countries, drawing on how Chinese consumers and industries have been “robbed” of premium quality goods.

Source: The Star