Driven by weakening economic activity and a desire to move away from thermal power production as pollution concerns grow, Chinese thermal coal imports are collapsing.
In July the country imported 9.7 million tonnes of thermal coal, a slight increase on June but down a massive 24.6% on levels of a year earlier. Revealing the broader trend, imports between January to July were down an even greater 39.1% on the same period of 2014.
A big decline, no matter what way you look at it. The chart below tells the story.
According to Vivek Dhar and Kofi Mensa, commodity researchers at CBA, there are a number of factors to explain the continued drop off in Chinese demand.
“The fall in China’s thermal coal imports reflects slowing economic activity, and a preference away from thermal power as pollution concerns grow amongst China’s coastal cities. Rising Chinese thermal coal supply and a 6% import tariff are also displacing the need for thermal coal imports. Currently, the import tariff impacts all countries except Indonesia, which has negotiated a free trade agreement. China’s thermal coal industry remains in structural oversupply with both state-owned companies, China Coal and China Shenhua, asked to reduce coal output. This is despite both companies being the country’s lowest-cost producers, highlighting the influence of small private coal operators who are not paying environmental compliance costs and taxes. Improving local coal railway infrastructure and stricter environmental regulation on coal imports will likely pressure China’s thermal coal imports even lower”.
That’s not great news for those nations that previously benefited from robust Chinese demand, especially Australia. As the largest external supplier of thermal coal to China, Chinese import volumes from Australia have already fallen by 15.3% over the past year, according to Dhar and Mensa.
Given weakening demand and market oversupply, the outlook for prices looks set to remain weak.
“Prices also continue to stay weak with spot thermal coal prices at ~US$60/t (FOB Newcastle),” they note.
“With demand slowing and traded thermal coal markets well supplied, we could see thermal coal prices remain subdued until we start seeing thermal coal export supply reduce.”