Australian thermal coal prices up by $6-7/t on increased buying from China

Key Highlights

• The upcoming fresh imports quotas from Jan’21 has once again brought the Chinese buyers back in the seaborne import market pushing up the Australian thermal coal prices.
• A supramax vessel of Australian 5500 kcal/kg NAR coal was booked by an Indian trader for October shipment at $45-46/t, FoB Newcastle basis.
• Last week trades for Australian coal by Indian buyers were heard at around $39-40/t on FoB Newcastle basis.

How dynamics changed in China?
a) Delay in customs clearance: China is one of the key export destinations for Australian thermal coal. However, in order to promote domestic coal use and defer imports, China had delayed customs clearance of Australian coal to around 40 working days from Feb’19, which increased to 60 days this year amid increased trade tensions between the two countries.

b) Informal import quotas: Apart from this, the Chinese government placed informal short-term quotas on coal imports and five major power utilities in the country were directed to reduce their Australian coal imports with an agenda to promote domestic coal.

Subsequently there was oversupply of Australian coal in the global market, resulting in its prices lowering down.

c) Imports cheaper than domestic coal: However, as new quotas are to be announced within the next two months and the domestic coal prices (5500 kcal/kg NAR at $89.5/t) remain on a higher side as against imported coal, Chinese buyers are booking large volumes of Australian coal (for November end – December loading) despite the demurrage risk of two-three months.

Likely Australian supply disruption

a) Mines’ closure: The COVID-induced poor seaborne coal demand globally has prompted the mining giant Glencore and its Chinese joint venture partner – Yancoal to undergo mines closure from 25 Sep-18 Oct’20 in order to curtail production and bring in demand-supply balance.

b) La Nina event: Australia’s Bureau of Meteorology has declared that La Nina has developed in the Pacific Ocean, which is likely to bring more heavy rain and cyclones to coal producing regions of Queensland and New South Wales and disrupt exports.

Significant flooding would affect rail and port networks along the east coast of Australia and could potentially lead to a sharp surge in coal prices in the upcoming months.

Outlook ahead

There is a halt in the Chinese buying activity this week due to the National Day holidays in China. We believe that the Chinese buyers would continue to make bookings for Australian coal post holidays, thus providing support Australian thermal coal prices.

Apart from this, the ongoing coal mines’ closure in Australia and La Nina event would further shake up the demand-supply balance, resulting in firmness in export offers for Australian thermal coal.