Commentary on Political Economy

Wednesday 10 February 2021


Aussie coal ban backfires on Beijing

A worker sorting coal on a conveyor belt near a coal mine at Datong in northern China's Shanxi province. Picture: AFP
A worker sorting coal on a conveyor belt near a coal mine at Datong in northern China's Shanxi province. Picture: AFP
  • By Chuin-Wei Yap

China’s ban on Australian coal imports is intensifying a crisis in its coal market, which is battling surging prices, supply shortages, conflicting policy goals and a cold winter.

Locked in a diplomatic brawl over Canberra’s call for an independent global inquiry into the origins of COVID-19, Beijing imposed an informal ban around September that forced boatloads of Australian coal to languish at sea. China’s central government made the embargo official at a mid-December meeting with major Chinese electricity producers, who are big buyers of thermal coal.

The ban complicated a supply crunch that the meeting was convened to solve, government and state media reports show. China was short of thermal coal and officials urged the companies to import more--from anywhere except Australia, China’s biggest supplier. To comply, buyers in China have had to pay steep premiums for imports from farther afield, on top of prices that have risen 84 per cent since mid-year.

“Coal buyers are on tenterhooks watching the import market,” the China Coal Transportation and Distribution Association, which represents importers, said in a statement. “It’s been hard to replenish low coal inventory and shortages, while demand is unabated.”

From Norwegian salmon to Mongolian commodities, Beijing has in recent years increasingly used China’s buying heft to apply political pressure abroad--but the coal market is showing that the strategy can backfire. Even as Chinese buyers obeyed Beijing, Australia’s coal prices rallied as other buyers from big coal-consuming nations, including Japan and India, stepped in.

“It’s a pretty crazy situation,” said Rory Simington, a principal analyst at energy researcher Wood Mackenzie. “The price of high-grade coal in Australia right now is at a big discount to spot coal in the Chinese domestic market.”

Prices in China surged over the seven months through January to records of more than $US130 a tonne for high-grade thermal coal--nearly twice the mid-year level--due to slower output last year and a faster-than-expected economic recovery.

The Chinese coal association said prices have this month started to edge down for some coal varieties, and Beijing’s top economic planner last month assured the public that China has enough coal to meet demand. The shortage has eaten into coal reserves, though hasn’t weighed on industrial output yet. A longer jag of high prices, if unaddressed, could have slowed China’s manufacturing and risked a public outcry. The National Development and Reform Commission, which organised the December meeting to stabilise the market, didn’t respond to a request for comment.

Two big state-backed Chinese coal indexes on December 30 said that the market was so chaotic that they could no longer provide such pricing.

“The government needs to adopt measures to increase coal supply to guide the market back to a reasonable range as soon as possible,” the China Electricity Council, which owns one of the indexes, said in a statement. The council resumed its index a week later, but modified it to a weekly, rather than its previous daily, format. The coal association, which also halted its index, hasn’t resumed pricing high-grade coal.

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The voracity of China’s energy market, the world’s largest, shapes global commodity prices and shipping flows. Coal supplies about 60 per cent of China’s energy consumption, more than half of which goes toward electricity generation.

Chinese leader Xi Jinping has sought to curb China’s fossil-fuel appetite, part of a bid for global leadership on climate change, laying down ambitious climate goals that seek to cap coal consumption and promote alternative energy sources, such as wind and solar.

But the leadership’s environmental policy has run at odds with an economic recovery that has driven up coal demand and a coal industry that includes powerful mining interests. Provincial governments often publicly defend job security at mines.

Beijing has since 2018 maintained quotas that limit coal imports, which further an environmental agenda but also buttress Chinese coal. The government acknowledges the existence of the quotas, but doesn’t disclose their terms.

An excavator moves coal at a Chinese port. Picture: AFP
An excavator moves coal at a Chinese port. Picture: AFP

Coal production hit a peak of 3.97 billion tonnes in 2013, and fell thereafter due to Mr Xi’s policies, but began to rebound in 2017 and reached 3.84 billion tonnes in 2020.

“Worryingly, China remains committed to supporting the coal industry,” global researcher Climate Action Tracker said in a December report. “After lifting a previous construction ban on new coal plants in 2018, China has rolled back policies restricting new coal plant-permitting in each of the last three years.”

The current shortage stems in part from a sprawling anticorruption and environmental probe in China’s central and northeastern coalmining country. Local governments there warned last year that coal production had sharply declined, as the investigation delved into deadly mining accidents. Chinese environmental regulators have publicly criticised coal as an ecological liability.

As temperatures dipped to the lowest in 40 years in northern China, the coal crunch drove Beijing to global markets. The National Development and Reform Commission abandoned its import quota--but shunned Australia.

Australia is known for its abundance of top-quality coal. In China, the domestic shortages are sharpest in such grades, and in recent weeks traded as high as twice the price of its Australian counterpart, commodity price databases show. After the local indexes were halted, some Chinese buyers had to accept prices as high as $US139 a tonne in domestic transactions, people in the industry say.

In a bid to locate alternative sources, Chinese importers have had to venture as far as North America, paying a $US100 premium last month for US coal over Australian prices, commodity-pricing service Argus said in a report. The Australian government didn’t respond to requests for comment.

The coal shortages were caused by “a string of underestimations of how the market would react to developments, including the broader economic recovery, the corruption probe, production cuts, and import restrictions, “ said Li Xuegang, vice president of the China Coal Transportation and Distribution Network, an industry group.

In January, seven coal-producing companies attended another meeting organised by the government in Beijing, where they vowed to stabilise the market, according to state-run Xinhua News Agency. But the plan might take time to work, analysts say.

“Supply issues will continue to be a core factor affecting the coal market in 2021,” Mr. Li said.

Wall Street Journal

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