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Column: China scores coal own goal as domestic, import prices surge

LAUNCESTON, Australia (Reuters) - China may have shot itself in the foot with its restrictions on coal imports, with domestic prices surging just as the peak winter demand period gets under way.

Piles of imported coal are seen at a coal terminal of a port in Lianyungang, Jiangsu province, China July 26, 2018. REUTERS/Stringer

A second blow is the sharp increase in the price of imported coal from the seaborne market. This also appears largely related to China’s effective ban on imports from Australia, the world’s largest exporter of coking coal used to make steel, and the second-largest of thermal coal, used to generate power.

The curbs on Australian imports appears to have had the effect of boosting the price of seaborne alternatives, such as those from Indonesia and South Africa. Perhaps ironically the increase in these prices has dragged Australian thermal coal higher as well.

China may be facing the least desirable outcome in its coal sector - domestic prices well above the government’s preferred range, and import prices also moving higher, making what little the country is buying from overseas more expensive than usual.

The situation in the coal sector may also be worsened by the potential disruption to the domestic market from the deaths of 23 miners at a mine in the southwestern city of Chongqing on Dec. 4.

The miners died after being trapped underground by what’s been called excessive levels of carbon monoxide gas at the Diaoshuidong coal mine, a private operation with an annual capacity of 120,000 tonnes.

While the loss of the mine’s output is minor, what could be more important is the likely safety checks usually imposed in the wake of such incidents.

China on Sunday ordered local authorities to “resolutely take decisive measures to effectively stop major accidents in coal mines from happening”, according to a statement published on the website of the Ministry of Emergency Management.

Even before the mine disaster, domestic thermal coal prices were rallying, with benchmark coal at Qinhuangdao reaching its highest since April 2017, ending at 648 yuan ($99.23) a tonne on Dec. 4.

The price has surged 39% since the low this year of 467 yuan in late April and early May, a time when China’s economy was still battling to regain momentum after the lockdowns implemented to contain the spread of the novel coronavirus.

While the authorities in Beijing don’t set a formal price target for thermal coal, it’s believed they seek to maintain the price within a band of around 520 to 570 yuan a tonne. That level is seen to be compatible with ensuring adequate profitability for mines, while keeping electricity prices under control.

IMPORTS ISSUES

When the price breaches the upper level of the informal target, what has happened in the past is that China allows imports to rise, with generally cheaper overseas coal forcing domestic prices lower.

But Beijing’s ongoing, and increasingly bitter, dispute with Australia may make increasing imports at the current time somewhat unpalatable.

The problem for China is that while it can try to boost imports from other seaborne suppliers such as Indonesia, South Africa, the United States and Russia, it’s likely that this will involve a cost penalty. Also, there may not be sufficient free supply available on a short term basis.

China’s coal imports from the seaborne market have been falling sharply in recent months, partly as a result of the dispute with Australia, but also as part of efforts to limit annual imports.

Seaborne imports in November are estimated by Refinitiv at just 9.26 million tonnes, down from 10.15 million in October and not much more than a third of the biggest month so far in 2020, January’s 25.92 million.

The displeasure with Canberra can be seen by China’s imports from Australia coming in at a mere 695,000 tonnes in November, down from 2.25 million in October and just 7.3% of the 9.49 million tonnes seen in January, which was the strongest month this year.

But China has also been buying less coal from its top supplier Indonesia. November imports from the Southeast Asian nation stood at 3.88 million tonnes, which was up from 3.11 million in October, but well below the top month in 2020, which saw imports of 11.96 million in March.

In fact, for the first 11 months of the year, China’s imports from Indonesia were down 24%, while those from Australia were 11% lower.

If China were to try and boost thermal coal imports from countries other than Australia, it would find this comes at an increasing cost.

Indonesian coal with an energy value of 4,200 kilocalories per kilogram, as assessed by commodity price reporting agency Argus, rose to the highest since March in the week to Dec. 4, ending at $33.42 per tonne.

Coal at South Africa’s Richards Bay ended at $81.86 a tonne in the week to Dec. 4, the highest since mid-February and up 43% since the most recent low of $57.18 in mid-October.

The opinions expressed here are those of the author, a columnist for Reuters.

Editing by Kenneth Maxwell

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