Australian Coal Exports to China Due to Rise - An End to the Disruptions?
One of the advantages of maintaining unofficial government policies is that once they no longer are fit for purpose, they can quietly be discarded as they, after all, never were official government policies. This somewhat Pythonesque reality applies to the Chinese selective ban on imports of Australian goods and commodities, which came into force during the third quarter of 2020 as diplomatic relations between Beijing and Canberra soured. However, a change of leadership in Australia and an increasing Chinese appetite for commodities, amid an expected rebound in economic activities following the removal of the Covid policies, have seen the end of the ban without any fanfare.
The move by the Chinese authorities to discourage the country’s industries and utilities from importing Australian commodities caused quite a realignment of the seaborne flow of dry bulk commodities. However, all commodities were not equally affected. Again, as the embargo was never official, Beijing could apply it selectively and avoid economic self-harm by ceasing to import iron ore from Downunder. Hence, the flow of the steel-making ingredient remained undisrupted, especially as the world’s other leading exporter, Brazil, continued to face supply disruptions. This pragmatic approach did not stop the Chinese authorities from trying to limit the amount of hard currency flowing south through attempts to supervise and control the trading in iron ore.
One of the most significant changes in the coal trade was increased Chinese reliance on seaborne imports from Indonesia. At the same time, India shifted some of its purchases from the Asian island nation to Australia. Hence, in a tonne-mile context, the shift had limited impact. Nevertheless, the developments occurred during a period of high tonnage demand, Covid-related disruptions and port congestion, which led to some mildly bullish effects on freight rates. There were also vessels caught in a lengthy limbo off the Chinese coast as they were unable to discharge their cargoes of Australian coal, which contributed to a somewhat reduced vessel supply.
In the months following the ban, cargo order volumes for Indonesian coal to be discharged in China increased sharply. The aggregate monthly levels rose to unprecedented levels towards the end of 2020 but have since been trending lower. Still, the robust activities during the third quarter translated into solid imports during the final months of last year.
In a similar fashion, the cargo order volumes for Australian coal destined for India surged during the third quarter of 2020 as the country’s coal miners scrambled to find alternative markets for their output. However, the monthly volumes have remained less volatile than in the trade between Indonesia and China. Recent monthly levels are also more in line with what was recorded in the immediate aftermath of the ban.
Last year’s change of governments in Australia has provided an opportunity for a limited reset of diplomatic relations between China and Australia. The rhetoric between the two countries has been toned down in recent months amid a less confrontational approach from both sides. The trade ministers of Australia and China are also scheduled for a virtual meeting this week, which may contribute to further normalisation of the bilateral trade flows. While the easing of tensions is making life somewhat less complicated for many actors in the commodity space, it is far too early to speak of a paradigm shift as many potential geopolitical flashpoints remain in place.
The political thaw between China and Australia has led to a renewed interest in Australian coal from Chinese buyers, with several utilities receiving permission to source parts of their requirements in Australia. While not absolute, the ban has seen monthly cargo order volumes slumping to virtually nothing compared to what was recorded before the ban in July 2020. However, the past month saw cargo volumes for Australian coal bound for Chinese ports rising to the highest levels since July 2020.
The increase in order volumes came following reports towards the end of the first week of January that one of China’s largest importers of coal had contracted two shipments from Australia. The development gathered some momentum as the month progressed, and by the end of January, twenty cargoes carrying 1.3 million tonnes had been recorded for the near future. The new month has also seen a reasonably solid start, with five orders totalling 233,000 tonnes registered. While aggregate volumes remain well below past levels, the improving diplomatic relations between the two countries could see further recovery in volumes. Still, the upside may be somewhat limited as cargo order volumes for India remain robust and Australian supplies tight. Hence, a return to the pre-embargo levels may not be feasible in the near term, despite the Chinese government’s renewed focus on economic growth.