Beijing is unlikely to lift the coal ban on Australia

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A forest wheel recycler stands next to a coal pile at the port of Newcastle in Newcastle, New South Wales, Australia, on Monday 12 October 2020.

David Gray | Bloomberg | Getty pictures

China is facing its worst power crisis in several years due to coal shortages. While Australia has the coal that Beijing needs, it is unlikely that the world’s second largest economy will reverse an unofficial ban on Australian coal imports soon, analysts told CNBC.

That despite recent media reports suggests that China is emitting small amounts of Australian coal that has been stuck in Chinese ports for months due to the ban.

“Reports that small quantities of Australian coal have been cleared through customs in China have raised speculation that Chinese authorities will try to ease the import ban on Australian coal,” Vivek Dhar, a Commonwealth Bank of Australia mining and energy analyst, told CNBC.

“We do not think Chinese authorities will ease China’s ban on Australian coal this winter,” he said.

At the end of last year, China stopped buying Australian coal. It happened that trade tensions between the two countries rose after Canberra supported a call for an international inquiry into Beijing’s handling of the Covid-19 outbreak.

Prior to that, Australia was a major supplier to China – in 2019, about 38% of Chinese thermal coal imports came from Australia.

The energy crisis in China

China relies heavy on coal for electricity production.

Since mid-August, at least 20 provinces across the country have reported power outages of varying magnitude. This was due to several factors, including a lack of coal supply, tougher government mandates to reduce emissions and higher demand for manufacturing as the global economy bounces back from pandemic levels.

Officials have reportedly urged top state-owned energy companies to secure deliveries for the coming winter at all costs.

But analysts say Beijing is unlikely to lift Australia’s import restrictions any time soon.

Instead, they predict that China will seek to increase its own coal production, exploit other international suppliers and pressure its industries to reduce production and emissions.

There are no signs that China will allow companies to buy new shipments of Australian coal, according to Rory Simington, chief analyst at Wood Mackenzie.

China is likely to put pressure on Indonesian suppliers for more coal, but they are almost at their peak.

“The political situation has not improved at all,” he told CNBC:Squawk Box Asia“in mid-October.” This is largely a political issue and not an economic one, and yes, no signs of easing the ban on new cargo. “

Beijing may also seek other countries for more coal.

“China is likely to push Indonesian suppliers for more coal, but they are almost at peak capacity,” Abhinav Gupta, a dry cargo analyst at shipbroker Braemar, told CNBC earlier this month.

“China has also tried to get more Mongolian and Russian coal to meet its demand, but there is some competitive pressure for Russian coal from European buyers. We have also seen China buy more coal from suppliers in the Atlantic, such as the United States. and Colombia, “Gupta said via email.

Dhar from the Commonwealth Bank said that despite the informal ban on Australia, China’s thermal coal imports have held up “quite well” due to a growing volume of supply from Indonesia and Russia. Between January and August, Indonesia accounted for about 57% of China’s imports of thermal coal, he said.

Impact on Australia

Australian thermal coal at Newcastle Port, the benchmark for the Asian market, increased this year despite China’s import ban, according to commodity price supplier Argus.

“The main driving force behind current thermal coal prices, especially from Australia, is demand in North Asia ahead of this winter,” Dhar said. He added that Australian coal prices would probably depend on how cold the coming winter will be.

A freight train transports coal from the Gunnedah Coal Handling and Preparation Plant, operated by Whitehaven Coal Ltd., in Gunnedah, New South Wales, Australia, on Tuesday, October 13, 2020.

David Gray | Bloomberg | Getty pictures

Elevated coal prices are unlikely to fall immediately even if China lifts the ban on imports of Australian coal, according to Shane Oliver, head of investment strategy and chief economist at AMP Capital.

“I doubt that China lifting the import ban would have a major impact on Australian producers because they would only redirect back to China but still get the same price,” he said in an email. “In the end, the sky-high prices will not be maintained, but they still can [be] loud for a while yet. “

Australian export revenues have held up well despite the coal ban and a sharp decline in iron ore prices, Oliver said.

The Commonwealth Banks Dhar said that if Beijing resumed buying coal from Canberra, it would only increase demand for Australian coal and further support prices.

Nevertheless, Australian officials have criticized China for the trade sanctions that extended to other export articles – such as wine and barley.

In a statement to the World Trade Organization last weekAustralia said: “China says these actions reflect legitimate trade problems, but there is a growing body of information showing that China’s actions are motivated by political considerations.”

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