Thursday, December 24, 2020

"China's own goal on Australian coal ban gives traders a massive free kick" (Glencore smiles)

Speaking of coal, the world's largest consumer of same is learning how commodity markets really work. 

From the Sydney Morning Herald, December 23:

Coal is a globally traded commodity, as China appears to be discovering, along with an unpleasant insight into the nimbleness and creativity of participants in the global markets.

China’s ban on Australian coal is having a more visible effect on China than it is on the Australian coal exporters.

The street lights and billboards are being turned off in its major cities; factories are being shut down or forced into reduced shifts; office lighting and lifts have had their power cut off; consumers have been told not to use electric stoves and to turn off their heating until the temperature falls below three degrees Celsius.

The ban on Australian coal has coincided with a rapid uptick in China’s economy as it emerges from the pandemic and with particularly cold weather, which would normally result in a surge in demand for energy coal and in coal prices.

China imports of coal from Australia are dominated by the metallurgical coal used in steel-making. Only about 30 per cent of the coal exported to China is energy coal and it represents only a fraction of the largely-domestic coal China uses for power generation – overall it imports less than 10 per cent of its needs.

In some of the more industrialised provinces with the most modern generation, however, Australian coal is a key source of energy because of its quality, which leads to greater efficiency and fewer emissions.

China, partly as a result of its ban on Australian coal, is paying a significantly higher price for coal of lesser quality.

That gives Australian coal a significance beyond the simple tonnages sold into China.

While the Chinese authorities are keen to downplay any link between the ban on Australian coal and the power shortages now being experienced, there is a very transparent signal – a price signal – of the impact the ban is having.

As a result of the ban, China’s power companies are scrambling to secure alternate supply, with imports from Indonesia, Russia and South Africa rising sharply. So, too, has the price of their coal.

The price of Australian energy coal plummeted during the pandemic to less than $US50 a tonne but has since recovered to about $US80 a tonne.

Since the ban on Australian coal, however, that price has diverged significantly from the prices being received by other suppliers. South African coal, for instance, is now being sold into China at $US100 a tonne, a 65 per cent increase on its pricing earlier this year.

Thus China, partly as a result of its ban on Australian coal, is paying a significantly higher price for coal of lesser quality.

The world’s biggest seaborne coal producer is Glencore, which is also the biggest of the Australian energy coal exporters.

Glencore’s roots are in trading and marketing commodities but it also has a big coal portfolio. While the Australian operations dominate – they represent nearly two-thirds of its production – it also has mines in South Africa and Colombia.

Glencore, and other miners and traders, would look at the impact of China’s ban on coal prices and see as much opportunity as threat.

If the price of South African or Indonesian coal is $US20 a tonne more than Australian coal, the obvious arbitrage is to sell the higher-priced product to China and replace it for either domestic use or to fulfil contracts with other customers by sourcing Australian coal....


Previously, December 15: 
Coal Prices Fall ….

Having started a trade war with one of its major commodity suppliers China is now discovering that it’s not the only customers for Australia’s exports with ANZ Bank noting earlier today that while the ban had a short-term detrimental affect on thermal coal prices the decline was now being reversed.

According to the bank the price of coal exported from Australia’s major thermal coal port of Newcastle fell nearly 15% to about $53 a ton in October while Indonesia coal prices rallied.

“However, as Chinese buyers adjusted their sources other markets tightened up,” ANZ said....


Funny how that works.