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China-Australia tiff to hit dry bulk demand

The Chinese government has prohibited the import of Australian coal, which will be detrimental for dry bulk vessels.

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China’s non-coking coal import sources, Jan-Aug 2020 (Mt). Source: Drewry
China’s non-coking coal import sources, Jan-Aug 2020 (Mt). Source: Drewry

As Chinese importers make the shift from Australia to Indonesia and Mongolia, this will result in a decline in average haulage length and a loss in shipping demand.

 

“Deteriorating relations between Australia and China are now a major threat to the dry bulk market, which is already severely constrained by the ongoing pandemic,” stated Drewry Maritime Research.

 

“As per media reports, the Chinese Government is prohibiting the discharge of coal cargoes sourced from Australia. Although the government is yet to confirm officially, it will, if true, be a severe blow to any prospects for a recovery in the dry bulk market.

 

“About 93 Mt of coal is moved annually on the Australia-China route, accounting for about 2% of total dry bulk seaborne trade. However, the ban’s impact on the dry bulk market will differ for coking and non-coking coal imports.”

 

Finding an alternative for Australian non-coking coal should be straightforward for China because Australia is not currently a dominant supplier. China sourced just 21% of non-coking coal from Australia against 61% from Indonesia during January-August 2020.

 

“Due to the low global demand for coal amid the ongoing pandemic, Indonesian miners will most likely fill the Australian void in China’s non-coking coal imports,” said Drewry.

 

“The distance between Indonesia and China is almost half the distance between Australia and China, implying that the tonne-mile demand will shrink by 50%, even if China’s non-coking coal imports remain intact.

 

“Moreover, weakening demand for imported coal in China will also reduce the burden of replacing Australian coal. During January-August, China imported 148 Mt of non-coking coal – a decline of 16.5 Mt over the same period in 2019.

 

“In addition, the Chinese Government is encouraging the use of domestic coal and clamping down on the use of coal in electricity generation, reducing the requirement for imported coal.”

China’s coking coal import sources, Jan-Aug 2020 (Mt). Source: Drewry
China’s coking coal import sources, Jan-Aug 2020 (Mt). Source: Drewry

Finding an alternative for Australian coking coal will not be so easy over the next three to four quarters. Australia is a dominant source for coking coal to China, accounting for 62% of the latter’s coking coal imports during January-August 2020.

 

“Due to China’s rising crude steel production, its dependency on imports will remain high even though the government is encouraging domestic coal use,” explained Drewry.

 

“Although Mongolia is a major supplier of coking coal to China, it cannot fully replace Australian coking coal in the Chinese market in the next three to four quarters. Therefore, if the government imposes a ban, China’s overall coking coal imports will slump over the next one year, hurting dry bulk vessel demand.

 

“However, in the medium term, Mongolia will meet the requirement of Chinese steel mills. Mongolia is laying down 415 km of railway network from Tavan Tolgoi coal mine to the Zuunbayan China-Mongolia border, which is likely to be operational by the end of 2021.”

Figure 3: Australia’s coal exports, 2019 (Mt). Source: Drewry
Figure 3: Australia’s coal exports, 2019 (Mt). Source: Drewry

 

The railway network will have an annual capacity of 30 Mt, more than 70% of Australia-China coking coal trade in 2019. Since trade between Mongolia and China is over land, any shift in China’s imports away from Australia to Mongolia will be a complete loss of shipping demand.

 

“For Australia, finding an alternative destination will be a difficult task for its miners,” continued Drewry. “Other major destinations for Australia’s non-coking coal are Japan, South Korea and Taiwan which have a combined share of 62% in Australia’s non-coking coal exports. As all these countries are either witnessing a decline or marginal growth in non-coking coal consumption, the scope for export growth to other these destinations is limited.”

 

The remainder of Australia’s non-coking coal exports go to India and Southeast Asia, and the growth prospects in these markets are also limited. Demand for coal is weak in India due to the pandemic, and the Indian government is determined to reduce import dependency by substituting non-coking coal imports with domestic coal. Moreover, the rise in exports to Southeast Asia will also be moderate due to their overall low import volume.

 

“The imposition of the ban on Australian coal will significantly impact the dry bulk market. Seaborne trade of coking coal will decline because of China’s inability to find an alternative for Australian coking coal in the short term and an increase in land-based imports from Mongolia in the medium-term,” said Drewry.

 

“Effectively, it will wipe out about 120B tonne-miles of coking coal trade annually. Similarly, suppose China replaces Australian non-coking coal with Indonesian supply. In that case, dry bulk demand will decline by more than 80B tonne-miles even if import volume remains intact at the 2019 level.

 

“Overall, the ban will squeeze about 200B tonne-miles annually, equivalent to 1.0% of dry bulk tonne-mile demand in 2019. Although it is only a 1% fall in overall dry bulk demand, the impact on the bigger bulk carriers such as Capesize and Panamaxes will be more profound,” concluded Drewry.

 

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