Peter Ker and Michael Smith
The notion that China might halt imports of thermal coal for the first six weeks of the northern winter would have been unthinkable just two years ago.
But unconfirmed reports on Friday that the Chinese government will not allow any further coal imports in 2018 are just another sign of the changes Australian commodity exporters are experiencing in the wake of China’s determined effort to reduce air pollution during its colder months.
Thursday marked the effective start of winter in China, when state heating started pumping into people’s homes, particularly in Beijing and the nation’s north.
Australians living in Beijing, who were starting to become accustomed to blue skies, complained this week about the poor air quality in the capital, with some of them posting images on Twitter of a thick grey haze enveloping the city’s skyscrapers.
Winter has taken on a special significance for Australian companies exporting energy commodities (principally liquefied natural gas and thermal coal with energy content of 5500 kilocalories per kilogram) into China, since the middle kingdom put tough operating limits on factories and heavy industry in 26 cities last winter.
Those cuts were designed to curb power consumption and industrial pollution, but expectations that they would trigger a seasonal slump in demand for Australian thermal coal proved wrong when a colder-than-expected winter and a shortage of fuels sparked extra demand and a 15 per cent surge in coal prices between November 15, 2017 and February 2, 2018.
Chinese demand for LNG also surged last winter, taking prices from about $US5 per million British thermal units to about $US11 per unit.
Industrial limits extended
The winter limits have been extended to 82 cities this winter, and Chinese authorities have made a big effort to connect more homes to the grid ahead of winter in a bid to reduce domestic burning of low-quality fuels.
They have also directed power generators to change their purchasing habits, with larger stockpiles of coal and LNG built up ahead of this winter.
“In an effort to prevent winter price increases, power-generating companies (GenCos) have implemented a strategy of building high inventories. The inventory of key state-owned power plants has now reached a record high of over 90 million tonnes of coal, which is over 30 days consumption,” said Wood Mackenzie’s Beijing-based analyst Zhai Yu.
“The six large GenCos in the coastal region have stocks of 33 days of consumption as of November 14 which is also a record high. As a result GenCos have little requirement for (buying coal on market). Some GenCos have even had to cancel some contracted volumes recently as they have run out of stockyard space.”
The suggestion that Chinese customers deliberately boosted coal purchases during the traditionally weak “shoulder” season between the summer and winter peaks fits with reports from Australian coal miners like New Hope, who remarked in September that demand was stronger than normal for the “shoulder” period.
Woodside chief executive Peter Coleman said China had made similar changes to its LNG purchasing habits.
“You are seeing a greater shoulder in the period, so basically the period in which China starts purchasing is earlier and it goes through later in the season,” he said on the sidelines of the Melbourne Mining Club this week.
“China learned from last year, last winter that the peakiness in demand in the market really distorted the market, it distorted prices and it meant they were not able to get gas to consumers in China during the peak of winter.
“I can see this year they have worked through that … they have flattened out some of that demand.
“The total [demand] is increasing but the peakiness has gone out of it.”
Mr Zhai said this Chinese winter was tipped to be warmer than last, and he forecast thermal coal demand for heating could be 50 million tonnes lower than last winter.
“We think the [coal] market will shift from oversupply in autumn [October and November] to tight supply in winter. However, coal prices will not rocket like last year,” he said.
“The high-inventory strategy, lower-expected-demand and increasing imports in January will result in the coal price fluctuating between RMB600 per tonne ($US86 per tonne) and RMB 630 per tonne ($US90 per tonne) in the winter period.”
Australian coal exporters will closely watch the longevity of China’s coal import curbs, particularly in the unlikely event that they extend beyond December 31.
“We understand GenCos have booked large volumes of import coal for delivery in January when there is no import quota problem and part of their inventory is consumed. We estimate seaborne thermal coal import will be over 20 million tonnes per month in the first quarter 2019,” said Mr Zhai.
“Coal prices could increase if China keeps restrictions on coal imports in (the first quarter of) 2019.”
Mr Coleman said demand for LNG imports in February and March should be clear before Christmas.
“Cargoes for February really need to be purchased in December, so in December we will start to see how (customers) feel they are positioned,” he said.