(The opinions expressed here are those of the author, a columnist for Reuters)
LAUNCESTON, Australia (Reuters) - China has reportedly told coal traders and users to stop imports from Australia with immediate effect in a move that would choke a major trade channel for both countries, a major escalation of political tensions between the pair.
Commodity price reporting agencies S&P Global Platts and Argus, as well as other media outlets, reported in recent days hearing from unnamed sources that Beijing had given “verbal” instructions to some steel mills, power companies and coal traders to halt imports from Australia.
If the reports are accurate - there has been no official confirmation yet - it would constitute a serious deterioration in the relationship between Australia and its largest trading partner. Coal is one of the big three Australian commodity exports to China, coming in behind iron ore and liquefied natural gas (LNG).
Ties between the two have been severely strained on a political level by Canberra’s call for an international investigation into the novel coronavirus pandemic, which originated in China before spreading globally.
So far Beijing has effectively banned imports of Australian barley, placed restrictions on wine and meat, and discouraged students and others from travelling to Australia.
While these measures certainly are negative to the sectors involved, they are still relatively insignificant when compared to the overall trading relationship between Australia and China.
Australia is China’s top supplier of iron ore and coking coal, the two main ingredients used to make steel, while also being a major provider of LNG and thermal coal, used predominantly in power stations.
It’s worth noting that this isn’t the first time that China has supposedly imposed some sort of ban, or go-slow, on imports of coal from Australia.
The most recent occasion was in March 2019, when there was reported to be an unofficial slowing of customs clearances of Australian cargoes.
However, despite extensive reporting on the delaying of shipments, Australian coal exports to China seemed to show very little impact, with a small dip in February 2019 being made up a rebound in March that year.
It will take several months to work out if China is being more serious this time around, or if the reported import restrictions are just part of the wider cut and thrust of the ongoing political tensions.
In the meantime, vessel-tracking and port data compiled by Refinitiv show that China has already been slowing imports of Australian coal.
September imports of all coal types from Australia were 5.48 million tonnes, down from 6.04 million in August and 8.17 million in July.
In year-to-date terms, China imported 67.68 million tonnes from Australia in the first nine months, a drop of 7.3% from the same period in 2019.
Still, it’s worth noting that Indonesia, traditionally the biggest supplier of coal to China, has seen steeper declines: China’s imports from Indonesia in September were 4.18 million tonnes, the lowest since Refinitiv started vessel-tracking in January 2015.
For the first nine months of 2020, China imported 86.63 million tonnes from Indonesia, down 17% from the same period last year.
China is believed to have been restricting coal imports, particularly thermal grades, in order to support prices for domestic miners, and it appears that so far Indonesia has taken a bigger hit than Australia.
Another factor worth noting is that while coal is one of the big three Australian commodity exports to China, it’s still the one upon which China is least reliant, and Beijing has a realistic chance of being able to source alternative supplies.
In thermal coal, China can source similar grades from Russia, South Africa, Colombia and the United States without incurring too much of a financial penalty through higher freight charges.
In coking coal, the situation is somewhat tricker.
Australia’s share of China’s coking coal imports in the first half of 2020 was about two-thirds, according to the Australian government’s latest Resources and Energy Publication.
Australia is the world’s largest coking coal exporter, supplying about 55% of the traded market.
If China were to stop importing from Australia, it would have to scramble to buy whatever it could from neighbouring Mongolia and Russia, as well as Canada and the United States.
While the price of Australian coking coal would no doubt suffer, the prices of these other types would also likely rally strongly: Cutting off imports from Australia will potentially be a costly exercise for Beijing.
It would also make coking coal cheaper for regional steel-making competitors, such as Japan, South Korea and India, handing those countries an advantage in the highly competitive steel export market in Asia.
These may be costs Beijing is willing to bear in its bid to keep Australia in check, but there is always a risk of undue and unforeseen escalation of the conflict.
The conservative government of Prime Minister Scott Morrison may deem it worth the risk of retaliating, with the obvious candidate being Australian iron ore, upon which China is heavily reliant.
Australia supplies about 68% of China’s iron ore imports, and there is absolutely no way the rest of the world could make up for the shortfall if shipments were halted.
Given the reliance of the Chinese economy on steel as the key component of infrastructure, construction and manufacturing, an Australian ban on iron ore exports would have a far bigger impact on China than a Chinese ban on Australian coal imports has on Australia.
Editing by Kenneth Maxwell
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