Demand for Indonesian, Russian thermal coal heats up amid China’s curbs

The Asian thermal coal market seems to be in a round of musical chairs this month, as China tightens its port restrictions for Australian coal, despite a shortness in its domestic supply.

Australian cargoes have been facing difficulties entering the China market and are starting to be diverted to other markets including India, allowing Indonesian and Russian high CV cargoes to be well sought after in China, market sources said.

An east China power plant has issued a buy tender for Indonesian thermal coal ranging from 3,800 kcal/kg NAR to 5,500 kcal/kg NAR.

“Usually for 5,500 kcal/kg NAR grade coal, end-users will call for Australian coal as higher CV Indonesian coal is more expensive,” a China-based trader said.

Market players in China said delays for Australian coal have increased from 40 days to as long as three months.

Industry participants said that the import curbs were due to strained China-Australia bilateral ties, but officials in both countries have downplayed such fears, attributing the long custom checks to environmental reasons.

At the same time, China’s domestic market is facing a supply crunch. Authorities have ordered massive mine checks and mine shutdowns in Shaanxi and Inner Mongolia — both major coal producing regions — after two accidents occurred in January and February.

Prices of domestic thermal coal have surged over 9% since the beginning of the year, as industrial activity resumed after the Lunar New Year holidays, and are inching towards Yuan 640/mt FOB Qinhuangdao this week, S&P Global Platts data showed.

FILLING IN GAPS

Gaps in the Chinese seaborne market left by Australian suppliers and surging domestic prices have presented opportunities for Russian and Indonesian high-CV producers to enter the Chinese market, several market sources said. However, there are challenges ahead.

Australia’s bituminous export to China jumped to around 72 million mt last year — an average of 6 million mt per month — from 41 million mt in 2017, Platts data showed.

Indonesia, on the other hand, exported a total of about 7.2 million mt of bituminous coal to China in 2018, up slightly from 7 million mt in 2017, according to Platts data.

Russia’s total coal exports in January and February stood at 15.26 million mt and 13.91 million mt, respectively. However, Russia’s Ministry of Energy, in its export and production data, did not reveal the share of thermal coal in this overall volume.

“Russian producers have wanted to expand their reach so this is a good time for them to boost their exports to China,” a Singapore-based market source said.

An Indonesian producer said they are receiving more inquiries from China for high-CV coal.

“Should they find alternative cargoes from Indonesia to fill the gap, buyers will have to use Supramax or Panamax vessels,” the producer said.

Australian thermal coal is largely shipped to China on a Capesize basis.

Though demand is up, market sources said supply from Indonesia might not be enough to quench China’s thirst.

“There’s limited quantity of high-CV coal in Indonesia, most resources have been used up in the past ten years going to Japan, South Korea and Taiwan,” an Indonesia-based market source said.

As demand picks up, some smaller scale high-CV coal producers are returning to the market after shutting production in the past few months.

“These producers see that prices have gone up to acceptable levels, so they are running production again,” a market source said.

It is noted that production costs of Indonesian higher-CV coal are above that of the lower-CV ones. As such, smaller-scale miners with lower budgets will stop production when demand is weak.

“The cost of [waste] stripping is high to produce such coal, and the amounts produced are limited, probably around 15,000 mt to 35,000mt per month for each mine,” the market source said.

Some of these mines are likely to load their coal together on one shipment, industry sources said.

TARIFF FOR RUSSIAN COAL AT 6%

There has also been a strong surge in Chinese purchase inquiries for Russian high-CV thermal coal after the Lunar New Year break, market sources in China said.

“Demand for Russian coal is very hot now! Inquiries and trades are up by about 50%,” a China-based market source said.

Several traders told Platts that prices of Russian 5,500 kcal/kg NAR grade of coal have increased almost daily due to higher demand.

An offer for this grade was heard at $70/mt FOB Vanino Thursday, while previous offers have been heard at around $67/mt FOB this week.

“Last week, I concluded a trade at around $62/mt FOB and prices have gone up again,” a China-based trader said.

Traditionally, Australian thermal coal was deemed cheaper than Russian coal, as Russian coal imports into China are slapped with a 6% tariff on top of their CFR China price tag, which is an additional cost to Chinese buyers, market sources added.

“Now with Russian thermal coal prices surging, the arbitrage between Russian imports and domestic coal is narrowing, so end-users in China might be hesitant to import now,” one market source said.

It also remains to be seen if demand for Indonesian and Russian high-CV coal will persist as the custom curbs for Australian cargoes are expected to be lifted after May.