Just six days into 2023, the China Energy Investment Corp struck a deal to import Australian coal, putting an end to an almost two-year unofficial ban imposed by Beijing on imports of this fossil fuel from Australia. This deal is likely to be followed by others as the restrictions are relaxed. With coal being a critical commodity for the energetic security of developing countries, lifting the ban may impact prices and supply chains, putting more pressure on emerging economies, or, conversely, it could relieve the market. We asked some experts to share their opinions on this.
- In January 2023, China’s National Development and Reform Commission agreed to allow importers to resume Australian coal procurement, lifting the unofficial ban imposed at the end of 2020 as relations between Beijing and Canberra worsened.
- As industry experts note, China was forced to “thaw” relations with Australia because it could not obtain sufficient volumes of fossil fuels from Russia;
- China’s bolstering of its energy supplies by resuming coal imports from Australia may not result in competitive pricing, according to some experts.
DevelopmentAid: What does China’s lifting of the ban on Australian coal mean for prices and supply?
“China is a major consumer and hence lifting the ban on Australian coal will certainly add to demand. Relevantly, the war in Ukraine and the consequent embargoes on regular liquid and gas energy streams from Russia have already created extra demand for coal. Therefore, in the short term, the coal price will be on an upward trend, or at least there is no potential for it to drop. The critical questions are whether the demand will be sustainable, as well as the response from the supply side, and other global issues including the impact of politics on the energy sector. In reference to the very nature of mining, global coal supply cannot be responded to overnight, nor can it resume a lower extraction level once mining starts. Consequently, if there is no huge stock at par demand, the price of coal will rise, while in the long term, it will significantly decrease. The forecasted recession will also work as a brake on industries and energy demand across many economies. In a nutshell, coal prices will be on the rise for a few months and then nose dive after probably around a year.”
“When China banned Australian coal for its market, new suppliers appeared such as Russia, Indonesia, and Mongolia. However, due to the Russian-Ukraine war the suppliers are not beneficial for China due to the increase of coal prices. China’s lifting ban on Australian coal was highly demanded by Chinese domestic energy supply pressure since the price difference between Australian coal with China’s domestic coal has decreased due to the Russian-Ukraine war. In this sense, lifting of ban on Australian coal will increase the price of the coal and benefit the supply of coal in China. Australia has limited interest in restarting the coal export to China, since they diversified the coal export markets since they were banned (October 2020) with Japan, India, South Korean, United States of America and Canada and having China again as buyer will impact the diversification of international consumers of Australian coal. In addition, the Chinese interest on Australian coal will increase the prices and shipments, it will benefit Australian sellers and Australian government from the tax take.”
“Politically, the resumption of coal imports is a positive by-product of the Australian Prime minister’s meeting with the Chinese premier in November 2022. Whilst the ban remained in effect, China had to source supplies from Russia, Mongolia and Indonesia instead and also increased its reliance on low-quality domestic production. At the same time, Australia was successful in redirecting its coal deliveries elsewhere in Asia: in 2020 Australia supplied PRC with 57% of the 216 million tons of seaborne thermal and metallurgical coal it imported but less than 0.5% in 2022, yet coal has still become Australia’s top export earner. Therefore the overall effect on commodity pricing is not expected to be significant. It is likely that high-quality coal prices will see a modest medium-term increase as opposed to the hitherto downwards trend, with thermal coal trading in January 2023 at much less than half the rate of 400 USD/ton it reached in 2022 after the invasion of Ukraine. Metallurgical coal availability has been less disrupted by the sanctions on Russia and prices are expected to remain more stable, as the supply has generally held up. In the longer term, the increased impediments in obtaining finance and insurance for coal – as a result of the currently prevalent green energy advocacy – are anticipated to increase the cost of the commodity.”
“Any trade ban has a distortional effect on the market players, resulting in chain modifications or trade diversion. Looking at China as the biggest consumer and producer of coal in the world, and one of the top three importers of coal from the global market, and Australia having been within the top five producers/suppliers of coal worldwide since 2007, the unofficial ban made more Australian coal available hence increasing the supply of coal to the global market. The lifting of the ban will reduce global supply, hence coal prices might register a slight increase. If Australia begins exports to China, other coal suppliers will take over some of the markets that were previously supplied by Australia during the China ban. This will reroute trade to countries that could not export to China and at the same time could not compete with Australia on the global coal market.”
“China’s bolstering of its energy supplies by resuming coal imports from Australia may not result in competitive pricing since coal trade routes and volumes have changed with China’s inland coal production, established relationships between importers and bulk providers from Russia and Mongolia. The diverting of Australia’s coal in 2020 to the new markets of Japan, India, and South Korea will impact the supply of coal to China, not to mention the increased cost variables in the supply chain when considering the geographic proximity of Russia and Mongolia to China as opposed to Australia. At China’s 2023 Coal and Mining Expo in October, the bilateral re-engagement on coal imports from Australia will be observed by international traders at the nation’s premium trade show. The rise of coal demand from the EU since the embargo on Russian fossils fuel imports is an opportunity for Australia as part of the trilateral union (India-Japan-Australia – Supply Chain Resilience Initiative -SCRI) to create alternative economic appeal in the EU and the expansion of the SCRI amongst other emerging coal producing markets such as South Africa.”
DevelopmentAid: Will these actions impact international trade?
“The China’s lifting of ban on Australian coal will change the international trade flows since China will cover again (gradually) Australian coal production. Indonesia, Mongolia, and Russia will decrease their coal exports to China. As well, it might be an increase of the coal prices in the international trade and the shipment industry will be benefit will the resumption of imports of coal from Australia. Considering the case of China with Australian coal, it could be important to considerate to increase the use of renewable energies. According to the International Energy Agency, the world coal use increased in the last year with a 1.2%. The increase of renewable energies use could be part of the solution. This should be specially considered by China (called the “world factory”), to accomplish its commitment to cut emissions to net-zero by 2060 that was mentioned in the UN General Assembly in September 2022.”
“Even though coal imports have been the major flashpoint in the Covid 19-induced trade war between China and Australia since 2020, the former retains import restrictions on a number of (primarily comestible) products. Simmering umbrage remains in PRC political circles concerning Australia’s embrace of the AUKUS defence pact and the subsequent increase in modern weapon system acquisitions. Many analysts have stressed that the decision to import Australian coal after the two-year ban was driven by diplomatic, not economic, considerations. The International Trade impact of this move is to be understood by considering the underlying semantics and policy underpinning the import resumption rather than the value of the upcoming coal deals per se: at the World Economic Forum in mid-January 2023, PRC’s vice-premier proclaimed the country’s eagerness to strengthen international cooperation and “promote economic reglobalisation”. Thus, the termination of the unofficial coal embargo ought to be appreciated as a part of China’s unambiguous policy decision to address the perceived damage to its reputation as the planet’s manufacturer and the driver of the world’s commodity markets. Interestingly, If the above assessment remains valid, it is possible that reinvigorated Chinese industrial output could push demand for oil and liquefied natural gas thereby extending the woes of energy insecurity in Europe and the world.”
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See also: Energy poverty and prices on the rise. Consequences and Solutions | Experts’ Opinions