Coal is a globally-traded commodity, as China appears to be discovering, along with an unpleasant insight into the nimbleness and creativity of participants in the global markets.
China’s ban on Australian coal is having a more visible effect on China than it is on the Australian coal exporters.
The street lights and billboards are being turned off in its major cities; factories are being shut down or forced into reduced shifts; office lighting and lifts have had their power cut off; consumers have been told not to use electric stoves and to turn off their heating until the temperature falls below three degrees Celsius.
The ban on Australian coal has coincided with a rapid uptick in China’s economy as it emerges from the pandemic and with particularly cold weather, which would normally result in a surge in demand for energy coal and in coal prices.
China imports of coal from Australia are dominated by the metallurgical coal used in steel-making. Only about 30 per cent of the coal exported to China is energy coal and it represents only a fraction of the largely-domestic coal China uses for power generation – overall it imports less than 10 per cent of its needs.
In some of the more industrialised provinces with the most modern generation, however, Australian coal is a key source of energy because of its quality, which leads to greater efficiency and fewer emissions.
China, partly as a result of its ban on Australian coal, is paying a significantly higher price for coal of lesser quality.
That gives Australian coal a significance beyond the simple tonnages sold into China.
While the Chinese authorities are keen to downplay any link between the ban on Australian coal and the power shortages now being experienced, there is a very transparent signal – a price signal – of the impact the ban is having.
As a result of the ban, China’s power companies are scrambling to secure alternate supply, with imports from Indonesia, Russia and South Africa rising sharply. So, too, has the price of their coal.
The price of Australian energy coal plummeted during the pandemic to less than $US50 a tonne but has since recovered to about $US80 a tonne.
Since the ban on Australian coal, however, that price has diverged significantly from the prices being received by other suppliers. South African coal, for instance, is now being sold into China at $US100 a tonne, a 65 per cent increase on its pricing earlier this year.
Thus China, partly as a result of its ban on Australian coal, is paying a significantly higher price for coal of lesser quality.
The world’s biggest seaborne coal producer is Glencore, which is also the biggest of the Australian energy coal exporters.
Glencore’s roots are in trading and marketing commodities but it also has a big coal portfolio. While the Australian operations dominate – they represent nearly two-thirds of its production – it also has mines in South Africa and Colombia.
Glencore, and other miners and traders, would look at the impact of China’s ban on coal prices and see as much opportunity as threat.
If the price of South African or Indonesian coal is $US20 a tonne more than Australian coal, the obvious arbitrage is to sell the higher-priced product to China and replace it for either domestic use or to fulfil contracts with other customers by sourcing Australian coal.
Glencore is a “value over volume” producer, so won’t be concerned if it produces a little less but is more than compensated with price and, with nearly half a century of trading and marketing experience, is probably better positioned than any of the coal exporters to extract profits from the arbitrage opportunity.
Those profits would be magnified if, as is occurring, Australian producers (but not, tellingly, Glencore) do shut down meaningful capacity as a result of China’s ban.
China’s steel mills, hit by higher coal prices and a soaring price for iron ore, have been caught in the middle of the Chinese sanctions on Australian products. Their margins would be negligible, even as they are on track – driven by the stimulus-driven rebound in China’s economy – to produce record tonnes of steel.
That’s why the mills have been complaining to BHP and Rio and their own authorities about the prices of their inputs and asking the authorities to investigate the steep increases in prices and crack down on possible violations of Chinese regulations and laws.
It’s not BHP or Rio that are the problem for the mills or power generators; it’s the nature of globally-traded commodities and the sophistication of the traders within those markets, including those within China.
By targeting a commodity – Australian coal – that, because of its quality and the reliability of its producers, has an influence on the market beyond its market share, China has forced the Australian producers to look elsewhere for customers and played into the hands of the traders by creating compelling arbitrage opportunities within the pricing of alternate sources of supply.
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Source: Thanks smh.com