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WoodMac comments on China's Dalian port restricting coal imports

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In response to the news on China's Dalian port restricting coal imports, Wood Mackenzie's experts provide the following commentaries.

Wood Mackenzie Senior Consultant Yu Zhai said: “We estimate China's seaborne metallurgical coal imports to reduce by 3 million t in 2019 as a result of China's coal import restriction. The high quality of seaborne coal, and difficulties securing alternative coals domestically, should insulate coal exporters from much deeper cuts, despite strong signals from China. Australia would account for most of the volume reduction as it represented over 75% of China's seaborne metallurgical imports in 2018. Australia exported around 36 million t of metallurgical coal to China last year, 20% of Australia's total exports.

“China's seaborne thermal coal imports is estimated to reduce by 15 million t in 2019, taking into account the risk of wider coal import restriction. Australia could also be most affected by a similar restriction.”

On implications on metallurgical coal, Wood Mackenzie's Research Director Robin Griffin said: “A prolonged China-wide ban could have enormous implications for markets in both countries. The possibility of adverse impacts on China suggest a long-term ban is unlikely. Some of the most prominent impacts could include:

  • “Chinese domestic prices would spike. Prices for low sulfur premium coals in particular would rise as importers scramble to replace Australian coals. We expect that short-term replacements will be hard to find domestically. There is a heavy reliance among coastal mills on low sulfur hard metallurgical coals from Luilin County in Shanxi. There are other similar coals in Anze County but these are typically used inside Shanxi by merchant coke makers due to high transport costs to the coast. As an indication of what might happen during an import ban, domestic coking coal futures jumped at the end of January on the news of import controls. Chinese steelmakers would ultimately see much costlier coke blends.
  • “Seaborne prices would decouple from Chinese domestic prices. We expect FOB Australian prices, particularly for premium and second tier HCCs, would come under severe pressure as Australian exporters look to sell excess coal into other markets. The decoupling would be of most benefit to steel makers elsewhere in Asia, and Europe, who would see a fall in coal costs. Australia's competitors in the metallurgical coal trade might see greater opportunities into China, but Canada and the US are already subject to some quality and tariff-related restrictions into China, limiting their potential upside. And of course, lower seaborne prices would offset the benefit of any extra demand from China.
  • “Mongolian coal imports could rise substantially in order to replace Australian coals. Weaker coals make up the majority of Mongolian exports so in the short-term direct replacements for Australian coals would be limited. However, new border crossing technology is being implemented to speed up trucking clearances, which would facilitate higher exports.
  • “A longer-term ban would force Chinese coastal mills to amend coke blends. There are options for mills to make blend changes, but not without implications. There are two common blends that could be utilised which would result in higher sulfur, higher ash, and lower CSR coke products:
    • "Use of more high sulfur (1.8% total sulfur) premium HCCs such as Luilin #9, blended with Mongolian second tier HCCs such as the #3 product to produce a tier 1 coke.
    • "Use of mid-sulfur Shanxi premium HCCs (1-1.3% total sulfur) with low sulfur (0.5% total sulfur) 1/3 metallurgical coals to produce a lower quality, but still a tier 1 coke."

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