Coal markets are being distorted by the heavy hand of Beijing

Coal markets have been deeply distorted by Beijing's blacklisting of Australian coal, providing Australian miners with an unusual set of incentives and undermining confidence in price setting mechanisms (reports The Australian Financial Review).
18th December 2020
Resources Rising Stars

Coal markets have been deeply distorted by Beijing's blacklisting of Australian coal, providing Australian miners with an unusual set of incentives and undermining confidence in price setting mechanisms (reports The Australian Financial Review).

Prices for top quality NSW thermal coal have risen by close to 50 per cent over the past four months despite China's blacklisting, thanks to reduced supply and improving demand in Japan and Korea, creating the unusual dynamic where thermal coal prices have been higher than prices for semi-soft coking coal.

The difference between thermal and semi-soft prices is closely watched by miners, who can convert thermal coal into semi-soft coking coal by spending money on washing the coal.

Miners are traditionally incentivised to do the extra washing when semi-soft prices are about $US10 higher than prices for top quality NSW thermal coal.

''You are not going to do that now if you are washing it to get a lower price, so there are a few strange things going on in the market at the moment due to this China issue," said coal industry veteran and former Stanmore Coal managing director Nick Jorss.

Another niche type of coking coal, commonly known as pulverised coal injection (PCI), traditionally sells at a premium to semi-soft, with Goldman Sachs reporting that premium as averaging $US10 since January 1.

But that premium has completely disappeared, with PCI and semi-soft both selling for $US75 per tonne last week; below top quality thermal coal at $US77 per tonne.

XCoal chief executive Ernie Thrasher said China's buying strike was also playing havoc with the numerous coal price indices that are based on the daily prices achieved in transactions between Australian coking coal miners and Chinese customers.

''There should be a raging debate on how can you sell (coking) coal to Japan and Korea on an index driven by China spot sales when there are no China spot sales," he said.

''So the Australian producers are getting harmed twice; they don't have the sales to China and their sales to other customers are being priced of an index that has no real price to it.''

In a bid to avoid Australian coking coal, Chinese steel mills are paying between 70 per cent and 100 per cent more to buy coal mined in China and Canada.

Some in the industry believe European mills with long-term contracts to buy Canadian coal are on-selling that product to China, then securing shipments from Australia and pocketing the arbitrage between the two prices.

''There is a perception this is good for anyone who is not Australian but I don't subscribe to that,'' said Mr Thrasher.

''I think any exogenous factor that affects global trade and distorts the market causes disrupted trade flows to occur which eventually sort themselves out, and when they sort themselves out, normally it is not a good ending for somebody.

''It is a little bit like musical chairs, when the music stops there is not enough chairs for everyone and someone is the odd one out.''

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