China’s policy on Australian coal is ‘as dark and impenetrable as night’ and that’s how it wants it
“Let your plans be dark and impenetrable as night,” is one of many maxims in The Art of War penned by the Chinese general, military strategist and philosopher Sun Tzu.
The advice may be 2,500 years old, but it still seems to be relevant in the great, or then again, maybe not so great Australian coal blockade on the Dalian docks in China’s north east.
Even the weapons used in the skirmish are a bit hazy.
Those on the ground, trading coal, are giving mixed messages; some say Australian coal has been banned indefinitely, others argue it is just taking an inordinately long time to clear customs.
China’s official position is it is largely business as usual, it’s just that Australian coal needs to be more rigorously tested these days.
“By doing so, it can better safeguard the legitimate rights and interests of Chinese importers and protect the environment,” Foreign Ministry spokesman Geng Shuang told a media pack last week.
Alternatively, it has been suggested the “ban/go-slow” will give struggling local coal miners a stronger foothold in their battle against the cheaper, better quality imports.
But the third theory that’s hogged the headlines, and obviously has the most serious implications, is it’s a warning shot across Australia’s political bow.
China is known to be unhappy about a number of things it sheets home to Australia’s politicians.
There’s blocking the nation’s tech-champion Huawei from the 5G mobile rollout.
Suggestions (largely in the media) China may have been behind the recent cyber-attack on MPs and parliament haven’t helped relationships, nor have Australian criticisms of the militarisation of South China Sea, although we are hardly alone on that.
However, Australia is more vulnerable to reprisals than most of the Middle Kingdom’s critics given its reliance on trade.
Exports to China, Australia’s most important buyer, are responsible for around 6 per cent of GDP.
Coal exports to China are worth 3.7 per cent of GDP alone, although the current action on the waterfront at Dalian is more like a rounding error, less than 0.1 per cent of the Australian economy.
Three birds with one stone
Of course, it could be all three.
Employing one weapon to cover three flanks with minimum effort, and no casualties, would be something Sun Tzu would have embraced with a pithy quote — maybe along the line of killing three birds with one stone.
Of the three explanations, the “official” one is perhaps the most dubious proposition.
There’s no denying Australian coking coal’s carbon intensity, and its ability to not only forge steel, but also to fill the air with smog.
However, it has a relatively low sulphur content compared to competitors — particularly the fossilised forests dug up locally.
The idea that Indonesian and Russian coal is happily waved through by customs officials tends to undermine the argument as well.
The second proposition carries a bit more weight.
If there was a flashpoint in this kerfuffle — it has a fair way before it can be upgraded to a “trade war” — it was perhaps the 230 per cent increase of total coal imports into China last month.
The 34 million tonnes of coal lobbed on China’s doorstep in January was a record month, and well above the 2018’s monthly rate of 20 to 25 million tonnes.
Around 15 per cent of Dalian’s annual coal quota landed in January alone, in what is not generally a peak month for imports.
The Dalian ban, if indeed it is a ban, is an extension of existing measures limiting unloading to daylight hours and extending customs’ clearance from the usual seven to 14 days, to more than 20.
Import bans and restrictions are not unusual at customs depots.
As Citi analysts noted, the current contretemps at Dalian is reminiscent of the impediments to Mongolia’s coal exports to China after the Dalai Lama’s visit in 2016.
Australian barley growers may be scratching their heads over the fuss too, given China launched an anti-dumping investigation into their exports in November last year without much being said.
“Given where Australian grain prices were late last year, that announcement at first left many in the grain trade waiting for the punchline — but it never came,” CBA commodities analyst Tobin Gorey said.
“Taking an allegation of grain dumping, or the need to test the safety of Australian coal, at face value is to miss the point. Australia’s relationship with China has been strained by various matters.”
China generally doesn’t worry too much about World Trade Organisation obligations when it imposes targeted irritants. Mr Gorey says fighting back is at best useless, at worst counter-productive.
“China of course is not doing this for a laugh but to make a point about who puts the most butter on Australia’s bread.”
There are potential costs for China in the action as well.
Local coal miners will be delighted if the embargo means higher prices and greater demand for their product. The steel mills in Liaoning province, behind the port at Dalian, will be less thrilled.
Iron ore prices and steel margins are sagging, right at the time the mills are due to fire up to full production after the winter and Lunar New Year slow down.
There is a reason why Australian coal is paid a premium.
Its higher quality increases productivity and has lower emissions, something a different branch of the Chinese administration appreciates.
So far, the ban/restriction affects a pretty small proportion of Australian coking coal — 7 million tonnes out of a total of 383 million tonnes per annum (mtpa) — at one medium-sized port.
If Dalian remains closed to Australia, those 7 million tonnes could probably find another buyer, like Korea’s steel mills, without too much disruption.
Spreading to other ports and into thermal coal, used in power generation, are the next possible steps; escalations way beyond irritation.
“Worst case? Around 40mtpa of Australia’s 207mtpa thermal trade and 40mtpa of Australia’s 176mtpa met coal trade might be displaced,” UBS commodities analyst, Glyn Lawcock said.
China digs up an eye-watering, lung-clogging 3.5 billion tonnes of coal a year, mostly used in power plants. Australia’s thermal quota could easily be filled by the likes of Mongolia and Indonesia.
The impact would be firmly on Australian producers who would probably take a haircut looking for other export markets.
RBC’s Tyler Broda says China’s stance could become more entrenched, and that is an entirely different issue.
“There is little firm information on whether this gets extended to other ports, but with the political nature of the ban at Dalian, and the push to help domestic economic activity, we would expect that does evolve to become policy,” Mr Broda said.
Mr Broda says there are even more powerful weapons in China’s arsenal of irritants should it choose to deploy them.
But for the time being, China seems quite content that its plans to the outside world are as dark and impenetrable as night.