China restricts coal imports to boost local miners

1-Oct-2018

China has introduced unofficial restrictions on coal imports in a bid to prop up domestic prices by slowing down customs approvals at key ports, in a move that threatens to disrupt a year of stronger-than-expected Chinese demand for Australian thermal coal.

Traders on Wednesday confirmed reports that dozens of vessels had been turned away in recent months, or were waiting off China’s coast to offload imported thermal coal shipments, after quotas were quietly introduced at some of the country’s biggest ports to boost domestic demand.

They said the latest restrictions, designed to encourage local power stations to buy more domestic coal, went a step further than last year when there was a customs slowdown and kerbs on imports at some tier two ports, which were later lifted. The latest move is believed to be a general quota imposed on China’s larger ports directly controlled by the central government.

Traders and Australian miners contacted by The Australian Financial Review confirmed a report in China’s respected business magazine Caixin, which said there were no signs that new restrictions on seaborne thermal coal imports into key ports in southern and eastern provinces would ease anytime soon.

“The reason for the restrictive policies on imported coal is because domestic coal does not have a price advantage. To put a cap on coal imports will bring a strong impact to Australian coal miners,” one trader in China, who did not want to be named because of the sensitivities around the unofficial caps, said.

Tariff trigger

Similar measures were introduced at some ports last year and later lifted as demand for coal increased during the winter. They were never officially announced as China does not want to be seen to be giving domestic suppliers an advantage over foreign companies, a key criticism of the Trump administration. China’s trade practices were one of the triggers for Washington’s tariffs on $US200 billion worth of Chinese goods introduced this week.

Second-tier ports started introducing new controls, including quotas to ensure coal imports were not higher than in the previous year, in April this year. The restrictions were later extended to larger ports controlled by China’s central government. They included ports in the cities of Xiamen, Zhuhai, Fangcheng, Nanjing, and Zhengjiang, traders and the Caixin report said.

Traders complained the restrictions were adding additional costs to imported coal, including additional transport costs and hefty overdue fees for every day a shipment was delayed.

The trend comes after Chinese imports of Australian coal were surprisingly strong in the first seven months of 2018 on the back of strong demand for power and weak output from hydro-electric generators.

That combination of factors ensured China imported almost 27 per more Australian thermal coal in the first seven months of the year than in the first seven months of 2017.

Price sensitivity

Official Chinese data published on Wednesday suggests the middle kingdom imported 84.28 million tonnes of thermal coal (from all nations) in the first eight months of 2018; an 18.2 per cent increase on the previous year.

New Hope Coal chief executive Shane Stephan told The Australian Financial Review that Chinese buyers were more sensitive to price than those in Japan and Taiwan, partly because imported coal was forced to compete against Chinese domestic coal miners.

“In the last couple of months, after a very strong first half, there is less Australian thermal coal going into China just in the last month or so,” he said.

“There is just less of it being demanded, and there is a considerable backlogs with regards to getting it through the import terminals, the ports.”

Mr Stephan said the extent of demand over the next six months would ultimately be driven by “the intensity of the winter” in North Asian nations.

Imports of Australian thermal coal by Japanese consumers in the first seven months of 2018 were largely flat, while South Korean imports fell by 19 per cent compared to the same period of 2017 as some Korean consumers preferred Russian coal.

In total, Australian thermal coal exports in the first seven months of 2018 were about 3 per cent higher than the same period of 2017.

UBS commodities analyst Lachlan Shaw said Chinese coal imports in August had been lower than July.

Mr Shaw added that September and October were often soft for thermal coal markets, given mild weather through the northern autumn. Demand traditionally tended to be strongest in early winter and early summer.

‘Significant upside risk’

Prices for top quality, Hunter Valley thermal coal have dramatically exceeded analyst expectations in 2018 and have in recent months been testing seven-year highs.

Macquarie noted that current coal prices had created “significant upside risk” to its profit forecasts for Whitehaven Coal, which produces in the New South Wales Hunter Valley.

“A spot price scenario generates 50 per cent and 100 per cent higher earnings than our forecasts and consensus for fiscal 2019,” said Macquarie analysts in a note published this week.

Current coal and oil prices would deliver 20 per cent higher earnings for BHP in fiscal 2019 than analysts have forecast, and 18 per cent higher than South32’s forecast earnings.

The price strength is also boosting other listed coal miners like Yancoal and New Hope, but shares in the latter have doubled over the past year prompting Macquarie to downgrade its buy rating to neutral.

Another trader in China said the restrictions would have a bigger impact on Indonesian exporters than Australia.

In 2017, Australia accounted for 26 per cent of China’s imported coal while Indonesia was 58 per cent, Russia 9 per cent Mongolia 4 per cent and the Philippines 3 per cent.

The big question for thermal coal markets is the degree to which they will be affected by the looming winter shutdowns of industry.

The policy sees heavy industry curtailed in a bid to improve air quality through the Chinese winter.

The policy was applied to 26 Chinese cities last year, but is set to be applied to 82 this Chinese winter.

Thermal coal was expected to perform poorly through last year’s winter shutdowns, but demand and prices were surprisingly strong as other power sources were unable to provide the heating required.

Source: FINANCIAL REVIEW