Let’s say that we take at face value that it is indeed China’s intention to be carbon neutral by 2060, and that their plans to add 40 gW in coal fired electricity generation – these are new projects announced just this year – are an interim measure in a transition towards a greener future. That being the case, what are we to make of reports, that started emanating from China this time last week, that imports of coal from Australia are to be banned from now on?

 

The news is confusing. Last Friday, S&P Global Platts reported that state-owned utilities and steel mills had received a verbal notice to stop importing Australian thermal and coking coal with immediate effect. There was, and still has not been, any official announcement made in China or elsewhere. No official notification has been received by the Australian government from Beijing or anywhere else. This comes on top of reports that bulk carriers carrying Australian coal have been sitting around in north China waiting to discharge for up to three months, waiting for customs clearance. What is going on?

 

Let’s get one thing clear: this is nothing about emission control. China remains the world’s greatest producer and consumer of coal. The automatic assumption appears to be trade and geopolitical tensions between China and Australia, which have been steadily building over time. Back in 2017 the Australian Security Intelligence Organisation (ASIO) warned that China was attempting to influence decision-making in Canberra, prompting Prime Minister Malcom Turnbull to announce laws designed to curb foreign interference. Beijing responded by freezing diplomatic visits. In 2018, Australia became the first country to publicly ban the Chinese tech giant Huawei from being involved in its 5G network, citing national security reasons.

 

The heat was further turned up this year with Australia first in calling for an investigation into the origins of Covid-19 in China, first detected in the Chinese city of Wuhan. China’s response has to start hitting Australia in the pocket, firstly in May putting 80.5% anti-dumping and anti-subsidy duties (the irony is sublime) on Australian barley and banning beef imports from four of Austrlaia’s biggest meat processors. Then in August China imposed anti-dumping and anti-subsidy probes on some Australian wines. Having suffered through the 1990’s drinking Jacob’s Creek wine – the tipple of choice at the time at parties in Liverpool – I too would like to see retaliatory measures, if only on behalf of my tastebuds. Then they effectively banned barley imports from CBH Grain, Australia’s largest grain exported, after pests were found in some shipments. Chinese cotton mills have also been ordered to stop buying Australian cotton or face tariffs of 40%.

 

So there seems to be a pattern, if an erratic and uneven one, as China looks to punish Australia. But even this erratic and uneven pattern is not necessarily chaotic or unplanned, in fact probably the opposite. A brief look at Chinese coal imports over the last couple of years shows how dependent China is on Australian coal. In 2019, Australia supplied 57% of China’s thermal coal imports, the exact proportion that China has imported this year from Australia too. Indonesia’s share has grown, but at the expense of Russia. For coking coal however, Australia’s share of imports has increased from 41.31% to 59.94%, at the expense of Mongolia. This is something that needs to be balanced out.

 

It is no surprise that since the news of the Australia coal ban started coming out of China the capesize index of the Baltic Exchange has been hit hard: average earnings have dropped from US$ 33,000 per day down to US$ 19,000 in less than ten days. Most of Australian coal is carried in capesizes, or the larger Newcastlemaxes (the largest laden bulk carrier able to leave Newcastle in New South Wales).

 

My own investigations in China with friends leave me in no doubt that they think the restrictions are political, even though BHP chairman Ken MacKenzie points towards “new developments relating to how China plans and moderates imports versus its own domestic coal production”, pointing towards one of the other real reasons why China is banning imports without making a big diplomatic deal out of it.

 

I think the reasons for this are fairly simple. Despite the rage of China against Australia, Australia still supplies vital resources to China, including iron ore, which for now at least China cannot live without. Keeping the blast-furnace fires burning is a necessity to keep industrial production high post COVID-19. China does not yet have sufficient alternative sources of iron ore to replace Australia.

 

The picture is even more interesting for coking coal, the blast-furnace fuel used in the steel making process. China will never be able to produce to be self-sufficent in coal, because the coal they produce is of insufficient quality, so they have to import it, mostly from Australia, as noted above. What are the alternatives to Australia? Mongolia certainly (overland), otherwise Russia, Canada and the US. South Africa currently imports coking coal itself, despite the abundance of thermal coal there.

 

So these unconfirmed reports appear to be China tweaking the tail of Australia without actually setting fire to it. Firstly by targeting products (barley, beef and wine) it can easily get from elsewhere, it can show muscle and intent. Then by delaying imports of coal from Australia by keeping ships alongside whilst customs clearance progresses slowly it can encourage domestic production and play mean with Australia, but without shutting the door entirely. Australia knows this, and is not provoking China via the WTO or elsewhere. After all, Australia needs China as a customer just as much as China needs Australia as a supplier.

 

The longer term is more complicated. During one of my conversations with friends in China this week, I was told of a ‘hot’ purchase enquiry from Chinese buyers for the largest maximum deadweight on 12.8m draft. These are intended for import contracts from Indonesia, who have masses of coal reserves, but no coking coal facilities to speak of, at present today. A ship is for life, not just for Chinese New Year, so these ships will probably be employed to ship thermal coal from Indonesia to southern China, where it is needed, and for some time to come. Some of you may have noticed that the other bulk carriers with 12.8 m draft are supramaxes; there are more purchase enquiries for Tier II compliant ships to service the domestic coastal coal trades, now; expect demand for these ships to increase as well.

 

All of which is to say, for ship owners at least, it’s an ill wind that blows nobody any good. Capesize owners are suffering for sure, but tonne-mile demand for smaller ships to take coal, thermal or coking, from Indonesia and Russia (and maybe even larger ones from Canada and the US) into China will continue to increase for some time to come. And Australia will continue to have a stop-start commercial relationship with China too, at least until China can find another supplier for the same high-quality commodities they require. And capesize owners will continue to endure the steep waves of a volatile freight market that will ripple down into the smaller sizes as the winds of geopolitical and macroeconomic change continue to blow around the world. This is one climate that I don’t expect to see changing any time soon.

 

Simon Ward