China-Australia coal price arbitrage hits record high

Source : https://www.argusmedia.com/en/news/2143324-chinaaustralia-coal-price-arbitrage-hits-record-high

 

The spread between China's domestic coal prices and values of similar quality Australian coal hit a record high this month with Chinese import curbs. This arbitrage is prompting Chinese buyers to purchase more Australian coal.

The cfr south China price of NAR 5,500 kcal/kg imported coal, which is mainly from Australia, was $39.35/t lower compared with the price of China's domestic NAR 5,500 kcal/kg coal on a fob Qinhuangdao basis, according to Argus assessments made on 11 September. This was a record high since Argus launched the cfr south China assessment in March 2011.

The price arbitrage narrowed last week to $36.91/t as firmer buying from China supported seaborne coal prices. The arbitrage was around $34.27/t after adjustments for port fees, freight rates and a 13pc value-added tax.

Large price spreads this year have been triggered by stricter Chinese restrictions on Australian coal, which weighed on Australian coal prices and boosted demand for domestic coal from Chinese utilities. China delayed clearing of Australian coal to around 40 working days from February last year, with Beijing in May this year stepping up the curbs by ordering key state-controlled power utilities not to import Australian coal with worsening trade relations between the two countries.

The spread between Chinese and Australian coal prices was much narrower earlier this year. It started to widen from $12.39/t in early April, after increased production at Chinese mines had slashed domestic coal prices in March with a slowdown in economic activity because of the Covid-19 outbreak in the country.

The wider price arbitrage prompted Chinese buyers to take larger volumes of Australian coal, at the risk of incurring demurrage of 2-3 months. Chinese imports of Australian coal reached 35.68mn t during January-July, 30pc higher compared with the same period last year, although imports in July fell

by 34pc from a year earlier to 4.09mn t as 2020 utility import quotas expired.

But Chinese demand has rebounded in the past two weeks as market participants expect Beijing to lift the restrictions. Chinese buyers booked a large amount of November- and December-loading Australian cargoes that they expect will be cleared at Chinese ports in January when the quota system rolls into 2021. At least four November-loading Capesize and Panamax cargoes of Australian NAR 5,500 kcal/kg coal traded at $39-40.50/t fob Newcastle last week, with prices at which deals were done rising as the week progressed. Most of these cargoes are likely destined for China.

China's appetite for seaborne coal could remain robust in the coming weeks, as there are signs that customs authorities look set to relax import restrictions. Authorities at Guangzhou and Fuzhou ports in south China's Guangdong and Fujian provinces respectively are looking at how much stockpiled imported coal is waiting for customs clearance at the ports, according to market participants. The move could signal a possible relaxation of import restrictions, while Guangzhou port could clear 1.5mn t of imported stockpiled coal, market participants said.

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