China's thermal coal import restriction could mean a game of musical chairs for producers

Rumours of a ban on Australian thermal coal to China swept through the thermal coal market in early March while in late February, five north-eastern ports in China implemented changes to clearance procedures for Australian thermal coal.

One thing appears certain - Chinese demand for Australian thermal coal has been significantly impacted, at least in the short-term. Even if an outright ban is not implemented, a three-month customs clearance time will significantly increase the cost and increase the risk associated with Australian thermal cargoes.

A diversion of approximately 40Mt of Australian thermal coal currently going to China into other markets would have a substantial impact on thermal coal trade flows.  Assuming China's import demand remains at current levels, increased imports from other origins would be required.

There are signs that demand for Indonesian coal has increased with Indonesian 4200gar prices rising by over US$10/t from lows in January this year. Higher Russian coal imports would also be likely. Increased demand for coal from these origins would provide opportunities for Australian shippers to increase sales into other Asian markets. However, 5500nar coal would require blending to a higher specification to be attractive in markets like Korea and Japan. This could limit the amount of coal that could be diverted to those markets. A significant increase in Australian high-ash exports into the Indian market would be required, but can it be absorbed? 

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Imported high-ash 5500nar thermal coal in India is mostly consumed in the non-power sector, including cement, paper and sponge-iron industries that together represented 110Mt of import demand in 2018. Power utilities predominantly import low energy Indonesian coal which is either consumed directly or blended with domestic coal. Power utilities collectively represented 57Mt of import demand in last year.

If Australian thermal coal was sufficiently attractively priced, import-based plants could potentially blend up to 10% of their requirements and plants currently consuming domestic coals could take 20% or more.

Given the scale of import demand - particularly for the non-power sector - it is possible that high-ash Australian thermal coal could flip into India replacing primarily Indonesian exports that would be re-directed to the Chinese market.