China's Coal Import Ban Has More Bark Than Bite
(Bloomberg Opinion) - Do you remember June when China stopped buying US soybeans and then stopped buying US soybeans? Or last year when China blocked imports of Australian coal and then stopped buying Australian coal? Yes, me neither.
One can think about Beijing's recent "ban" on Australian coal. China has suspended purchases and advised power plants and steel mills to stop using products from its trading partner, people familiar with the matter told Bloomberg News on Monday. There's no reason to doubt the seriousness of the intention - but if we've learned anything from previous episodes of this nature, China is unlikely to go ahead.
Take the last coal kerfuffle. The port of Dalian was reported to have suspended imports last February, leading to fears that simmering diplomatic tensions would destroy Australia's largest export trade (1). In fact, the opposite happened: China's imports of Australian carbon black rose 8.3% year over year in the next 12 months and have continued to grow since then.
The same thing happened with soybeans. Although state-owned companies were reportedly ordered to stop buying in June due to clashes in Hong Kong, the country saw record orders from American farmers just three months later. Anyone who sold soy over the bad news from Beijing would have missed the best quarter for Chicago soybean futures in four years.
There is good reason to believe that China's imports of Australian coal will really slow down in the coming months. About half of the trade is in the coking coal used to make steel, and the usual inventory cycle could suspend this activity anytime soon.
China's steel production is typically about 10% lower in the four months to February than the previous four months as winter pollution control measures and economic slowdowns related to New Year's production stall. This is likely to be particularly accentuated this year as the country sits on unusually high inventories of key steel products, which means there is currently little need to produce more:
It is possible that a similar picture emerges with thermal coal burned in power plants. Massive summer floods and the ongoing construction of new dams put China's hydropower production in August 26% above the five-year average. If this trend continues in the coming months - when the floods are drained from the reservoirs to make way for next season's rains - this could significantly reduce the share of coal in electricity generation.
Even if the demand for thermal coal continues, there is no guarantee that it will come from Australia. As we wrote, China is 95% self-sufficient when it comes to coal and has taken steps that could make it 100%, dismaying some utilities who prefer cheaper overseas products. These measures to reduce dependence on imported carbon, while political, are based on long-term goals rather than the temperature of the recent diplomatic battle.
China's trade relations are far more realpolitical than the heated rhetoric and fears of its partners suggest. Relatively smaller commodities like Australian barley or Norwegian salmon can become collateral damage if diplomatic spit, as China doesn't suffer much if it goes without them. Cutting off traditional industries like coal, oil and iron ore would be almost suicidal for a government trying to harness industrial stimulus to recover from the coronavirus pandemic.
Does that mean Australia can ignore this latest announcement? Incomplete. The country has grown rich from China's appetite for iron ore and coal. But President Xi Jinping is now aiming for net zero emissions by 2060. Massive investments in renewable energy are expected to be a core part of the next five-year plan, and even conventional carbon-intensive steelmaking is facing the challenges of a growing mountain of scrap.
Australia, the world's third largest exporter of fossil fuels, faces a fundamental challenge to its economic model in the coming decades as the world decarbonizes. The recent surprise won't stall the coal trade overnight, but it is a premonition of what will come when China's leaders start putting words into action. Australian coal is already trading at levels where miners will struggle to make a profit. There could be many lean years to come.
(1) Coal and iron ore tend to compete for the title of Australia's largest export by value. In the 2018 calendar, coal was at the top.
This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.
David Fickling is a Bloomberg Opinion columnist who covers commodities, industrial and consumer businesses. He was a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times, and the Guardian.
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