LONDON, Feb. 28, 2019 /PRNewswire/ -- In recent weeks, Australian coal cargoes have been facing increasing delays clearing customs at Chinese ports. Most recently, it was reported that Dalian Port, in North China, has banned Australian coal from being received. This Insight aims to explain the possible impact of such policies, which are making Australian coal less viable for Chinese consumers.
A weaker Chinese market makes this more feasible
Chinese coal imports have increased by a CAGR of 11% since 2015, considerably stronger than underlying demand growth of 1% per year. During this period there has been major consolidation of the country's coal mining industry that resulted in a 9% drop in coal production in 2016 and limited supply growth in 2017. This consolidation is viewed as successful, as profitability of the coal industry has improved; however, higher imports are an undesirable, albeit very predictable, outcome from supply-side reform and now market conditions are such that policy makers feel able to do something about rising imports.
While CRU estimate the Chinese coal industry remains profitable, margins are falling and are at their lowest since restructuring began. Coal demand, particularly in coastal China, fell significantly towards the end of 2018 as Chinese industrial activity deteriorated. At the same time, Chinese coal supply has gradually improved in recent quarters as the pace of capacity closures has slowed and incremental capacity has been expedited in order to bring down fuel costs. Coal production has risen by 5% y/y in recent months, while demand growth has slowed and most Chinese consumers have plenty of stock to use.
Both parties will be affected
Despite the fairly weak market in China, domestic thermal and coking coal prices have risen in response to this development, albeit slightly. In the last three years, Australian coal has accounted for 30% of total Chinese coal imports but CRU estimate that Australian met. coal accounts for 80% of met. coal imports on the coast (i.e. excluding inland imports from Mongolia). Australian thermal coal accounts for 20% of Chinese thermal coal imports, but the relatively high energy content of these tonnes means that Australian coal has accounted for 30% of energy imported in coal.
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