(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia Feb 20 Coal markets could
be forgiven for feeling slightly confused about the recent
signals coming out of top importer China, with both bullish and
bearish developments in evidence.
The most obvious bullish news relates mainly to coking coal
used in steel-making, and like many announcements in China it's
political in nature.
China said on Feb. 18 that it will suspend all imports of
coal from its nuclear-armed neighbour North Korea until Dec. 31,
a move that, if implemented, would bring a dramatic halt to
cargoes from China's fourth-biggest supplier of imported coal.
The statement from the Ministry of Commerce was brief and
didn't go into reasons for the ban, although it came shortly
after Pyongyang tested an intermediate-range ballistic missile
and the suspected assassination in Malaysia of Kim Jong-nam, the
half-brother of North Korean ruler Kim Jong-un.
It's possible that Beijing is sending a message of
displeasure to Pyongyang by banning coal imports, although a
similar ban announced last April was never implemented.
China's imports of North Korean coal surged 14.5 percent to
22.48 million tonnes in 2016 from a year earlier as buyers took
advantage of North Korea's price edge over Australia in
supplying high quality coal.
Chinese customs classifies North Korean coal as anthracite
as opposed to coking coal, but in practice North Korean cargoes
are mainly used for steel-making or in higher value industries
such as ceramics, making them direct competition for coking
Australia and Mongolia are China's top suppliers of coking
coal, and both would stand to benefit the most if cargoes from
North Korea are indeed halted.
Australia shipped 26.77 million tonnes of coking coal to
China in 2016, up 4.8 percent from a year earlier, while
Mongolia's supplies leapt 85.2 percent to 23.56 million tonnes,
with its rising popularity largely explained by a significant
price advantage over Australian cargoes.
However, if North Korea is unable to supply coal for the
rest of the year, it's possible that Chinese consumers will be
short by about 20 million tonnes of high quality coal, assuming
demand from the steel and other sectors remains steady.
Mongolian miners may have difficulty in ramping up output
significantly given the transport bottlenecks between the
landlocked country and its southern neighbour.
This may result in a larger call on Australian coking coal
cargoes, and may open the door for increased supplies from
Canada, Russia and even the United States.
Coking coal prices have dropped sharply since reaching just
above $300 a tonne in December, with the front-month futures
contract for Australian free-on-board cargoes on the
Singapore Exchange closing at $157.17 on Feb. 17.
Coking coal futures on the Dalian Commodity Exchange
jumped as much as 2.8 percent in early trade on Monday,
reaching a high of 1,270.5 yuan ($185) a tonne, although they
are still well below the peak of 1,618 yuan from November last
While the fourfold surge in coking coal prices last year was
unsustainable and the retreat since the November high looks
reasonable, it's possible that coking coal could receive a
renewed boost if the market believes that this time Beijing will
choke off imports from North Korea.
POLLUTION POLICIES TO HURT COAL?
A ban on North Korean imports is undeniably bullish for
coal, should it happen, but less certain is a draft policy
document that proposes measures to curb coal consumption and
The Ministry of Environmental Protection has proposed
forcing steel and aluminium producers to cut output and stop
Tianjin port from handling coal, according to a draft document
viewed by Reuters.
The measures are aimed at cutting pollution in northeast
China, home to numerous population centres, including the
capital Beijing, that suffer from high pollution levels.
While there is no guarantee that a draft document will
become official policy, it does support the view that pollution
concerns are becoming more important to policymakers.
If the measures are implemented, it would cut coal
consumption and make it more challenging for seaborne imports to
find a route into northeast China.
What may result is a tug-of-war between reduced demand and
lower available supply, which may result in lower prices if
demand drops by more, or in higher prices if the demand holds up
and the supply can't reach end-users because of restrictions on
For now, it seems that the bullish prospect of a ban on
North Korean imports is more likely to materialise than any new
major pollution controls, meaning seaborne coking coal prices
may be biased higher, at least in the short term.
Overall, it appears that this year's coal prices,
particularly for coking grades, may once again be driven largely
by Chinese political considerations, as happened in the rally in
(Editing by Christian schmollinger)