China’s coal boat diplomacy likely to extend until September
No one should expect an early end to China’s coal boat diplomacy that has resulted in discrimination against Australian imports being embraced at pretty much all the Middle Kingdom’s key import terminals.
The consensus view among Australia’s major coal exporters and traders is that progress on resolving China’s now post-winter carbon market prejudices cannot start until the May election clarifies the political colour of Australia’s next government.
According to an internal marketing note prepared by one of Australia’s bigger exporters, the most likely place to plant the seeds of resolution will be the next G20 meeting that is planned for the end of June.
As a result, in the note seen by The Australian Financial Review, the base case is that the import restrictions are expected to endure until at least September. This local view reinforces the persistent and consistent view from China’s coal face.
On Wednesday, for example, the Financial Review reported that Chinese authorities continued to deny that import restrictions were either politically motivated or targeted at Australian coal. But the traders who spoke to our China correspondent Michael Smith at the Coaltrans China conference in Shanghai indicated that Australian imports had been the target of bans and delays.
Smith’s cleverly textured piece included advice – from the managing director of the Chinese sovereign entity that is the majority owner of Australia’s third biggest coal miner, Yancoal – that Australia needs to be more empathetic towards China.
Significantly, the man who runs the Yankuang Group, Li Wei, noted that he was not concerned about coal demand in China and that Japan and South Korea remained strong markets for Yancoal.
From what we understand, contract performance for committed sales remains high in both thermal and metallurgical coal and a savvy host of Chinese and international traders have started playing in the Australian spot market in an effort to capitalise on the favourable arbitrage between China’s domestic market and the short price.
A diplomatic dispute, not a market trend
At times of opaque market dislocation like this, there is always a temptation to mix up the market’s short and long-term messages. Some want to read the tea leaves of what will likely be a passing diplomatic ruckus indicative of more fundamental change in the trends of demand in China.
But, for mine, the fact that stocks at China’s coal ports are relatively high probably says more about the relatively temperate northern winter than it does about the medium to long-term demand patterns for thermal coal generally and Australian coal in particular. Indeed, it seems likely that port and power station stockpiles have delivered China supply-side headroom enough to play a bit of politics with both sides of the coal market.
China’s place in the regional coal market is important to appreciate, as is the mix of Australia’s share of the Chinese market.
Last year Australia shipped $14 billion worth of coal to China with $9.2 billion of that to be earned from metcoal customers and $4.9 billion from the Middle Kingdom’s power stations.
In the end, Australia accounts for only 24 per cent of China’s thermal coal demand. The bigger share of that market is owned by Indonesia, which last year exported 125 million tonnes to China’s power generators. This balance is shaped by quality and price. Australian coal is generally of higher quality and attracts higher premiums from more mature Asian economies such as Japan and Korea.
Japan accounts for only 13 per cent of the seaborne thermal coal trade but last year it made up 39 per cent of Australia’s thermal coal exports. And collectively Korea and Taiwan take 26 per cent of our thermal pie. This is what makes Japan, more than China, the place that Australian coal needs to keep a weather eye on over the coming half a decade. It has been the demand backbone of Australian thermal coal for generations and the expectation is that it will continue to be a reliable customer that is prepared to pay the price for quality.
But, as Australia’s official forecaster observed in the March Resources and Energy Quarterly, the tempo of the recovery of Japan’s nuclear estate is increasing and the mix of its energy raw materials is becoming more diverse.
The quarterly reported that nine of Japan’s 42 nuclear reactors had earned approval to restart and had returned to some level of operation. The operators of another 18 reactors have submitted applications for a restart and are likely to be back in the generation business by the end of 2020.
Mongolia reassures Rio
Mongolia’s Minister of Mining and Heavy Industry appears to have reassured Rio Tinto that the occasionally controversial Oyu Tolgoi investment agreements will be left to stand.
In an interview with local media, Dolgorsurengiin Sumyaabazar indicated that termination of such profoundly important agreements would undermine Mongolia’s sovereign standing and risk future investment in its burgeoning mining sector.
“Various people with various backgrounds express their own opinions related to Oyu Tolgoi agreements. But we won’t terminate the Oyu Tolgoi agreement,” he said.
Mind you, the minister also noted that there were valid reasons for concern over the 2009 and 2015 agreements.
That committee reported recently and recommended scrapping the 2015 agreement that secured Rio’s $US5.3 billion ($7.4 billion) investment in expanding the Oyu Tolgoi underground project and it called for a revision of the original 2009 investment deal.
“Definitely, there were things to review and inspect,” Sumyaabazar said of the decision a year ago to appoint a parliamentary committee to review the agreements.
“We can’t deny that there are things to clarify, successfully execute the joint project, and there are some incorrect things,” he continued. “But I think this must be wisely resolved.”
Importantly, the forum for resolution of the problems apparently identified in the committee’s report has already been established in the form of a joint government and Rio working group. It is said to have made progress on a collection of issues, from tax settings to power supply. But it is firmly Rio’s hope that whatever progress is made in settling the concerns of its hosts, it will be made within the bounds of the standing investment agreements.
Trial by minorities
The Todd Corporation’s trial by the minorities of Flinders Mines has moved to breaking point – the board of the plucky iron ore junior has been forced to abandon plans to delist by shareholder antipathy.
Having been forced to alter its preferred pathway to a private life by a Takeovers Panel ruling of unacceptable circumstances, Flinders had not shelved its revised proposal “given the views expressed by shareholders”.
The Flinders board has previously insisted that an unlisted life would leave it more able to raise the funds necessary to afford a future in iron ore. But, understandably to a degree, the miner’s battered minorities hate the idea. As well as waging an increasingly aggressive social media war on the board, they have forced a 249D extraordinary meeting in an effort to relieve the company of its chairman and two other directors.
The background here is that Flinders owns a modestly sized, middling quality body of iron ore that has never quite earned the investment needed to build the mine, rail and port capacity needed to monetise it.
Along the way Flinders has, though, earned the support of an excessively private New Zealand company, namely Todd Corporation. It owns 56 per cent of Flinders and it is also the junior’s only lender. While that borrowing is unsecured, it would doubtless leave Todd in front of shareholders in the queue of creditors in an administration.
Careful what you wish for
And there, for mine, is the rub. This has become a careful-what-you-wish-for moment.
Todd capital has sustained Flinders since 2014. The company spent nearly $2 million on its two projects through the December half and entered the New Year with $2.8 million in the bank.
A new funding arrangement was signed with Todd in March that leaves Flinders with a call on $25.3 million to pay for a buyback, $4.6 million to cover the tax liabilities that will trigger and a spare $3 million for working capital.
Until now Todd has been content to cycle its debt into equity through a succession of raisings that allowed the business to pay back Todd debt. Those raisings have been wildly unsupported by other shareholders.
The question for the minorities is: what happens if that cycling stops?
Source: Australian Financial Review