If China stops taking Australia’s coal, will other countries fill the gap?
Chinese state-owned media appeared to confirm a ban on imports of Australian coal this week.
Australian officials are now trying to figure out how serious the threat is, and its implications.
If China stops taking Australia’s coal, will other countries fill the gap? Could Japan, India and South Korea?
A state-owned tabloid in China, The Global Times, this week reported China’s top economic planner was allowing the country’s power plants to import coal without clearance restrictions from several countries “except for Australia.”
It appears to confirm that the unofficial ban China placed on Australian coal imports in recent months has become official.
It’s part of rapidly escalating trade tensions that have seen China slap restrictions on a range of Australian imported goods including barley, wine, meat, and lobster.
Australia’s Government is still mulling the development, and it is unsure what type of coal is in the firing line.
But Simon Birmingham, the Trade Minister, says if the story is accurate it would appear China is using discriminatory trade practices against Australian imports.
He has reminded China of its obligations under international trade rules.
How much coal is involved?
In 2019, Australia exported $64 billion worth of coal.
Japan was Australia’s largest customer, accounting for 27 per cent of our total coal exports (worth $17 billion).
China came in second, accounting for 21 per cent of our coal exports (worth $13.7 billion).
India was third, accounting for 16 per cent of our coal exports (worth $10.5 billion).
However, Australia exports two types of coal — thermal coal and metallurgical coal — and the value of each export is different.
Thermal coal is the type used to generate electricity.
Australia is the world’s second-largest thermal coal exporter, accounting for 20 per cent of the world’s supply (behind Indonesia, which accounts for 41 per cent).
In 2019, Australia exported $22.7 billion worth of thermal coal, with the bulk going to Japan.
Japan accounted for 43 per cent of Australia’s exports, worth $9.6 billion, while China accounted for 18 per cent, worth roughly $4 billion.
The other type of coal Australia exports is metallurgical coal, otherwise known as coking coal.
It is used to make steel (along with iron ore).
Around 780 kilograms is needed to make one tonne of steel in a blast furnace.
Australia is the world’s biggest exporter of metallurgical coal, accounting for 55 per cent of the world’s supply in 2019 (with the United States in second, at 15 per cent).
In 2019, Australia exported $41.2 billion worth of metallurgical coal, with most going to India.
India accounted for 24.6 per cent of Australia’s exports, worth $10.1 billion, while China accounted for 23.6 per cent, worth $9.7 billion.
On Tuesday, Trade Minister Simon Birmingham said Australia was active in a number of markets, and it would continue to export coal to Japan, Korea, and India, and there had been strong growth in demand from Vietnam recently.
However, he was still trying to figure out what China was intending to do, including if its ban would extend to both types of coal.
“It is obviously a concern,” he told radio station 2GB in Sydney on Tuesday.
“Particularly a concern in that it appears to be an action being taken, if we are to believe the media reports, in quite an opaque way, that makes it challenging to be able to take it up to China through the World Trade Organization or other means.”
Vessels stuck off the coastline
In September, news was already filtering into Australia of an unofficial coal ban on Australian coal by Chinese officials.
In November, Bloomberg reported that, according to its analysis of shipping data, more than 60 vessels carrying Australian coal had been queuing for a month or longer in Chinese waters, refused permission to offload their cargo.
“Aussie coal producers might be looking at other destinations for coal, such as Japan or India but, given the quantum of impact, they will likely trim production as well,” Abhinav Gupta, a research analyst at Braemar ACM Shipbroking, told Bloomberg.
Now in December, thermal coal exports to China from Newcastle, Australia’s busiest coal terminal, have completely stopped — no ships have left for China this month and none are scheduled to leave before Christmas.
The Federal Government won’t say how many ships carrying Australian coal are currently waiting in Chinese waters, but the number has stopped increasing now that ships have stopped leaving Australia.
More than 100 bulk carriers are scheduled to depart Newcastle this month carrying coal to Japan, Korea and Taiwan.
Can Australia’s other coal customers fill the gap left by Chinese demand?
Coal producers are not keen to talk about the current situation, but they will be looking to shift their orders to other customers in the short-term, if possible.
Japan, South Korea and Taiwan have been stable customers of Australia’s, and Vietnam has become an important purchaser.
However, analysts say moves by foreign governments to cut emissions in coming decades do not bode well for Australia’s coal exporters in the long-term. Top customers such as Japan and South Korea are planning to reach a target of net-zero carbon emissions by 2050.
The office of Australia’s chief economist, in the latest Resources and Energy Quarterly (September), warned such long-term trends would constrain thermal coal prices in the future.
“Europe and South Korea are looking to reduce thermal coal consumption, while the world’s two largest consumers (China and India) have signalled their intention to reduce thermal coal imports by increasing domestic production,” it said.
“Competition from liquified natural gas is also expected to weigh on thermal coal demand, especially while LNG prices remain near record lows in spot and short-term contract markets.”
According to the office, thermal coal prices have stabilised at their lowest level in 14 years this year and, at current prices, “around one-third of mine production supplying the seaborne thermal coal market … is uneconomic,” and “a significant proportion of Australian thermal coal is loss-making”.
“In mid-August, Peabody announced a 50 per cent reduction in the workforce at its 2.5-million-tonne-per-annum Wambo mine. This follows a production halt at the mine since 19 June,” it said.
“Also in August, Glencore — Australia’s largest supplier of thermal coal — announced plans to reduce its overall Australian output by about 12 per cent relative to 2019 output.
“The cuts will focus on lower-quality coals that face the largest oversupply, and follow temporary operational stops at some Glencore mines.”
The office has forecast a large decline in Australia’s thermal coal export revenue, from $25.9 billion in the 2018-19 financial year to $20.4 billion in 2019-20, to $14.5 billion in 2020-21, before a slight increase to $16.8 billion in 2021-22.
What’s Labor saying?
Madeleine King, the Opposition’s spokeswoman for trade, says the Federal Government must make “trade diversification” a national priority and develop a genuine plan to guide Australia through this troubling period.
“Billions of dollars in trade and thousands of Australian jobs are at risk from these trade tensions,” Ms King said.
“The coal mining sector employs 46,000 Australians, with the export value of Australian thermal and metallurgical coal to China worth $14 billion a year.
“Under this government, Australia’s economic relationships with some of our most important neighbours, including India and Indonesia, have gone backwards.”