China ban widens Australian high-ash coal discounts

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China's ban on Australian coal imports, combined with cold weather in Japan, has blown out the discount of fob Newcastle NAR 5,500 kcal/kg high-ash coal to NAR 6,000 kcal/kg to its widest in two years.

The spread between outright prices of Australian NAR 5,500 kcal/kg spot coal, normally the most popular import for China's large coastal utilities, and that of tightly supplied high-calorific value (CV) Australian coal, which mostly sells to Japan and Taiwan, has ballooned to close to $30/t since December. This compares with a spread of around $10/t in May last year, just before China's import restrictions began to be felt.

NAR 5,500 kcal/kg coal was last assessed by Argus at $57.97/t fob Newcastle on 22 January, compared with $87.54/t fob Newcastle for NAR 6,000 coal. Even after heat adjusting the NAR 5,500 kcal/kg coal to NAR 6,000, the discount for the cheaper high-ash coal would still be a considerable $24.35/t, highlighting the severe impact of China's policy freeze.

The last time the spread between Australian grades blew out by this much was over two years ago when it reached a record of just over $50/t in August 2018. The root causes were similar because demand for NAR 5,500 kcal/kg in August 2018 had also fallen on account of port restrictions and import quotas in China, while supplies of high-CV coal were particularly tight given strong demand from Japan.

The ban was applied more tightly than ever last year after Canberra's call for an investigation into the origin of Covid-19. This fanned diplomatic tensions that were already evident in early 2019 following Australia's decision to exclude China's Huawei from its 5G technology network.

China's curbs pushed Australian thermal coal exports to China to near-decade lows in November of 530,000t and to zero in December. The curbs helped push Australian NAR 5,500 kcal/kg coal to $35.18/t on 1 September 2020, an all-time low since Argus began assessing the grade in 2012 and below the cost of production for many Australian firms. Global markets were also oversupplied at the time as China adopted a more protectionist approach and called on its producers to ramp up output.

But most prices in Asia rallied as the northern winter approached. The average of the weekly NAR 5,500 kcal/kg coal assessments was $44.69/t fob Newcastle during the full year until 24 December, the last weekly index for that month. It was also a severe drop from an average $54.33/t fob Newcastle in 2019 and $71.02/t in 2018.

Australian high-CV coal fared only a little better with a full-year average of $57.94/t fob Newcastle up until 24 December, compared with $75.94/t in 2019 and $105.44/t in 2018. Japan's overall annual thermal coal imports fell over 2020 to 105mn t, from 111.2mn t in 2019 and the lowest since 2011.

Supply cuts and stronger demand from Japan in particular helped high-CV coal rally most towards the end of 2020 and into this month. Japan appears to be burning more coal this month than in January 2020 and possibly December on account of the unusually cold winter, reduced nuclear output and tight gas supply. Japan's generation data for December are not yet available, but national power demand rose by 3.8pc on the year to an average of 109.7GW, according to grid operator data. And nuclear availability was reduced to just 2.8GW, from 7.3GW a year earlier, amid suspensions for maintenance and upgrade works.



China's decision to turn to higher-priced Russian, South African, Indonesian and Colombian NAR 5,500 kcal/kg as an alternative to Australian coal displaced many of those buyers as the winter approached. This encouraged typical buyers to turn instead to high-ash Australian product, which had become the most competitively priced coal, bringing about a mini-price rally from late November as sellers managed to increase their sales to Vietnam to record levels. They also lifted sales to India to a record monthly high of 1.7mn t in November, up by 435pc on the same month in 2019, as well as to Pakistan, the Middle East, Cambodia, Myanmar, Thailand and Chile.

But many of the new buyers of Australian high-ash coal are price sensitive and searching for bargains. "Australian high-ash cargoes should be selling for at least $10-15/t more than they are now, given the extent of China's winter requirements," one Australian seller said last week. As a result, producers and trading firms have been stepping up their efforts to blend NAR 5,500 coal with higher-CV coal for sale to South Korea and Taiwan, which seek substantial amounts of NAR 5,700-5,800 kcal/kg coal. "We find we can secure a premium for the high-ash coal that is sold as part of a blend," one seller said, referring to recent tenders awarded by South Korean and Taiwanese utilities.

By Claire Pickard-Cambridge

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