China to Increase Coal Imports from Indonesia

By Ulf Bergman

 

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As widely reported, there is currently a large flotilla of vessels laden with Australian coal at anchor of the Chinese coast. Around six million tonnes are currently awaiting to be discharged in Chinese ports, but with the ongoing political tensions between China and Australia showing no immediate signs of improvement, it looks very likely that the vessels will remain anchored were they are for some time. The Australian Prime Minister appears to be seeking a resolution to the problems causing many Australian cargoes to be trapped at sea, but success in the short-term looks rather unlikely.

Against a backdrop of trade frictions between China and Australia, Indonesia has announced that it will be increasing the thermal coal exports to China by around 200 million tonnes next year. The deal between the two countries is worth around one and half billion US dollars and will be reviewed annually. Indonesia, the world’s largest thermal coal exporter, has shipped just shy of 90 million tonnes to China in the first ten months of this year and, if the agreed increase is implemented fully, volumes would triple next year. If Indonesian coal were to replace the imported volumes coming out of Australia, there would be a reduction in tonne-mile demand due to the shorter distances involved.

However, an altered trade flow out of Indonesia is likely to favour mid-sized tonnage, such as panamaxes, rather than the larger vessels, which are often used in the Australian coal trade. An increase of the Indonesian seaborne coal exports to China of the announced magnitude is likely to be good news for owners of panamax vessels, with a considerable number of those vessel likely to find employment carrying coal across the South China Sea.

It is also interesting to note that the agreed increase in purchases of Indonesian coal is of the same magnitude as Australia’s total coal exports. Hence, it is possible that there is a political message as well, with Chinese authorities not seeing a normalization of trade with Australia anytime soon. That the quantities involved in the deal with Indonesia are reviewed on an annual basis gives Chinese purchasers a degree of flexibility to cover any shortfalls arising from disruptions in domestic production or if imports from Australia remain off-limits. The new five-year plan in China also expressed a desire for China to be less reliant on overseas supplies, which could see an increase in domestic production in the years to come.

However, in the short-term, China is likely to increase its imports of coal, according to a report by Wood Mackenzie. The company expects seaborne imports of thermal coal to be around twenty million tonnes in December, which is thirteen percent above the monthly average for the year so far. In addition, January is forecast to be colder than usual and likely to increase demand for coal in China.

Coal price, USD/ton

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An increase in Chinese demand for imported thermal coal is likely to be supportive of coal prices, which have already rallied from the lows seen in September. With Australian coal imports banned, it remains to be seen what the source for additional volumes would be. However, with year-to-date imports from Indonesia around 25 percent lower than last year, the country could be a likely candidate. A late year boost in Chinese demand for seaborne coal would also be supportive of freight rates.