Daily Management Review

China’s Unofficial Australian Coal Ban Is Proving Costly For It


China’s Unofficial Australian Coal Ban Is Proving Costly For It
There has been a rise in the cost of domestic and alternative foreign supplies of coal for both thermal and coking grades of the fuel in China since the country had unofficially banned importing of coal from Australia.
The ongoing political clash between China and Australia is a reason that Chinese authorities have effectively put an end to coal imports from Australia. China is the largest producer, importer and consumer of coal in the world while Australia is the largest shipper of coking coal that is used for making steel as well as the second largest shipper of coal used for producing electricity in thermal power stations.
China imposed by the unofficial ban on Australian coal imports in the second half of last year which resulted in the coal imports from Australia hitting near zero volumes by the first two months of the current year. Import of Australian coal into China dropped to zero form a high of 9.46 million tonnes in June of 2020, according to Refinitiv vessel-tracking and port data.
But the unofficial ban seems to have boomeranged on China's consumers of imported coal as they are faced with higher costs for the alternative imports of Australian coal. The costs of coal have been rising for both domestically produced as well as imported coal because of the adjustments being made to the unofficial ban by the market.
Apart from the usual seasonal gain for the northern hemisphere winter, there has been a weakening of the price of free-on-board Australian cargoes in coking coal since the ban was imposed.
Since the ban started to affect flows, the price difference has entirely reversed for a Chinese importer that started replacing from Australian coal cargoes with those from the United States.
The current price of coking coal from the US is higher by about $39 a tonne compared to the same grade of coal from Australia and that amount does not take into account the higher shipping costs because of the significantly larger distance that ships have to travel from the east coast of the US to ports in China. 
There has also been an appreciation in the price of China's domestic coking coal since the restrictions on imports from Australia were imposed. For example, there has been a 16 per cent surge in the Dalian Commodity Exchange futures from 1,353 yuan ($206.56) a tonne at the start of October to end at 1,573 yuan last week.
This price however cannot be directly compared to the free-on-board prices in Australia and the United States because freight and other costs as well as import taxes and duties are involved in the calculations.
Despite this, it clearly shows that there has been a rise in the domestic coal prices of China which is partially because of the higher costs of imports from the alternative sources of coal to Australia.
Currently the biggest supplier of coking coal to China is its neighbour Mongolia with 61.7 per cent of the total Chinese imports of coal in the first two months of the current year being accounted for by Mongolia. According to official data, in the same period as above in 2020, the share of Mongolian coal in Chinese imports was just 17.7 per cent.