China demand for Australian coal may lift freight rates

The proposed partial lifting of China's unofficial ban on Australian coal imports would likely also boost demand for US coal exports by widening Asia-bound arbitrages for the shipments, with the uptick in cargo demand putting upward pressure on Panamax and Capesize rates in the Atlantic basin.

The reintroduction of Chinese buyers eager for higher-quality Australian coking coal — should the ban be partially lifted, as appears to be the case — would put upward pressure on the commodity's price, potentially making US product more attractive to Asia-Pacific buyers outside of China. The fob price for Australian low volatile coking coal is at $308.20/t today, trading at around a $14/t premium to similar product from Alabama.

Australian coking coal may be especially desirable for Chinese buyers, as the quality is typically considered to be higher than other sources, while thermal coal volumes will likely not return to pre-ban levels. China typically purchased lower grade Australian coal, the supply of which was more easily replaced by Indonesian and Russian coal sellers using Panamax bulkers and Mongolian coal sellers by rail.

With the partial resumption in trade, Chinese buyers with access to deep-sea ports capable of handling larger Capesize volumes may be increasingly interested in Australian coking coal cargoes over smaller Panamax cargoes.

The resumption of long duration Australia-China Capesize voyages would help pull Capesize tonnage from the global fleet, providing upward pressure on Capesize rates in the Atlantic and Pacific basins. If the premium for Australian coking coal prices to alternative sources is boosted sufficiently by increased Chinese demand, other buyers in Asia-Pacific could still find arbitrages in US east coast coking coal, supporting Capesize demand, and US Gulf coast product, supporting Panamax demand, even if freight rates rise.

Australian coking coal producers are already noting the higher demand for their coking coal among Chinese mills, while restrictions on Australian coal were lifted Thursday for Guangdong ports as traders pointed out the nature of the "unofficial" ban made an official statement by the Chinese government of the reversal unlikely.

Low Chinese demand for US coal in 2022 may continue well into 2023 as China's domestic production is projected to rise. Increased competition in Asia-Pacific for Australian coal may then increase interest in US product from countries like Japan and South Korea, offsetting the drop in already declining Chinese demand.

By Ross Griffith