Relations Between Australia and China as Frozen as the Northern Hemisphere

By Ulf Bergman

 

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The Northern hemisphere is currently facing a colder than usual winter, which proves to be good news for energy prices. The cold spell has depleted inventories of oil, LNG and coal in north-eastern Asia, where the mercury has fallen the most compared to the norm. The increase in demand for heating have seen oil refinery output increasing by seven percent, compared to a year ago, in Japan and South-Korea considering tapping into the nation’s strategic reserves. Beyond oil, higher demand for LNG in the region has boosted prices and a spot deal above benchmark records has been recorded in the last few days.

The cold weather has exacerbated an already tight energy situation in China, as demand has been steadily rising in the wake of a rapidly expanding industrial production. Recently there have been reports of power cuts and that some cities have allegedly gone black, as power producers struggle to keep up with demand as the need for heating increases. An additional challenge for Chinese energy producers is the high dependence on thermal coal, which currently is in short supply in China. While global international coal prices have retreated from the high recorded in late December, domestic coal prices have surged in China and the national coal indices have stopped being updated in an effort to control the gains.


The ongoing trade spat between Australia and China is contributing to the surging domestic coal prices, with one of the major coal supplier being banned from exporting to the Chinese market. Currently there are some 70 dry bulk vessels languishing off the Chinese coast unable to discharge their cargo of Australian coal. At the same time, Chinese data show that imports of coal have increased from Mongolia, Russia and Canada as Australian volumes have plunged. From a shipping perspective an increase in imports from Mongolia is clearly not desirable, as such volumes would be moved over land by rail. More distant suppliers, such as Canada or Colombia the fifth and sixth largest providers, are clearly preferable to shipowners, with healthy additions to the tonne-mile demand. The transport capacity and readiness of the rail lines under currently construction between Mongolia and China will to a large extent decide where China will source the replacements for Australian coal.

If Australian thermal and coking coal remains banned by Chinese authorities, the coals will need to find alternative buyer, which will change the current trade flows. Japan and South Korea are already important customers for the Australian output and an increase would be beneficial for the tonnage demand with longer distances, but both countries are also looking to reduce their use of coal. India and Vietnam are other potential markets for the Australian coal.

Given the current strains in the domestic thermal coal market in China, there is a risk that the situation could threaten the strong industrial growth the country is enjoying at this time. The question is if the Chinese leadership will allow this and if a relaxation of the trade restriction would be possible if the cost is deemed too high. At the moment, the relations appear, however, to be as icy as the climate in the Northern Hemisphere and an improvement seems rather unlikely.