Coking Coal

This is what "friend shoring" looks like

Ian Verrender wrote a piece on the potential lifting of China’s coal import ban on Australia. There were so many factual inaccuracies in the piece including a few I outlined in tweets. In short:

• China has no thermal coal shortage. Inventories are high, output is high and yes, hot weather means more air conditioning demand but that is not enough to significantly drain stocks of coal.

  

• China’s self inflicted metallurgical or coking coal shortage is over. There are two reasons for this: China is importing from Mongolia again and will soon be one of Russia’s few customers left. You can see this in data when you combine shipping volumes and Mongolian export data. The big squeeze is over. Add to that the implosion of their real estate sector and this market is moving towards oversupply.

• As such, there is really no pressure for China to do this. They are fine, coking coal prices are falling and China’s domestic thermal prices are now around 875 yuan per tonne - or $130 per tonne. The spot price of equivalent coal from Australia or delivered to Rotterdam is $450. The idea China is going to import in that context is laughable and Australia’s chief business correspondent at the national broadcaster should do better.

So what is happening here? Let me hazard a guess:

Australia and its miners adjusted quickly and well to China’s trade actions. Broadly, China failed to coerce Australia. But Australia’s mining-lobbying nexus is powerful and also very bad at market research and they want more customers even if those customers are unlikely to ever come back. China would ideally like to offer Australia something in exchange for other things it wants - my guess would be pending takeover approvals for strategic assets in minerals - but knows that they are in fact offering nothing. The treasurer is from Queensland, a large coking coal mining state and probably gets an earful from miners all day every day. Add to that the Department of Foreign Affairs and Trade, which has a weak economic research function probably doesn’t understand these dynamics and wants to make itself relevant by doing a deal - any deal - to burnish its importance.

The real question in my mind is: how stupid and captured is Australian politics and will they go for this? If Australia does such a deal it gets nothing and ultimately looks very stupid and we have no idea what is being offered to China in exchange. Verrender and the like should stop publishing lobbyist talking points and start asking what the likely shape of such a deal is and whether it is in the national interest.

For China, none of this matters. They are going to have two more or less exclusive suppliers of coking coal and they win either way. Good for them. But it is up to Australia’s government to see this as it is and not get distracted by empty offers.