The Big Picture: China’s customs authority to “support” coal imports

The Big Picture: China’s customs authority to “support” coal imports

A statement from China’s customs authority on 31 October outlined “support” for imports of dry bulk commodities such as coal, grain and iron ore—suggesting the freeze on the coal import levy could be extended into next year.

This marks an apparent break with (unconfirmed) market reports from July suggesting a coal import target of 400m tonnes for 2023; some 348m tonnes were already imported in January-September.

However, Mongolian overland export capacity for (mainly coking) coal into China could expand further thanks to new rail links and cap seaborne coking coal import growth.

A statement from China’s General Administration of Customs (GACC) from 31 October outlined its “support” for imports of coal, copper, grain and iron ore. This is the first such statement since 2008, according to McCloskey.

Here, we focus on the implications for coal and freight—(1) the current picture, (2) which vessel sizes have benefitted and, briefly, (3) the long term.

Current picture

McCloskey reports the statement has been interpreted by some in the industry as a signal of an extension to the freeze on China’s coal import levy beyond its current expiry date of 31 December into next year.

The freeze was introduced in May 2022. The significance of this is outlined in the charts, right, showing a virtual doubling in quarterly coal imports since the Q2 2022.

In our 18 July Research Update, we highlighted unconfirmed reports in the coal media that China’s GACC had set an annual import target of 400m tonnes for 2023. With imports already establishing a new annual record of 348m tonnes by the end of September, the reported target of 400m tonnes is approaching rapidly.

However, the 31 October statement from the GACC now seems to signal that a clampdown on imports is unlikely in the near term.

This year’s import gains have not been driven by falling domestic production: output at China’s coal mines in January-September was up 3% year-on-year. Moreover, port stockpiles in China were 64.1m tonnes on 18 October, some 10.5m tonnes higher than at the same point last year, McCloskey reports.

In the past week domestic coal price cuts have been reported. The reasons may owe to softer demand, with some industrial activity curbed due to a build-up of air pollution. Nonetheless, Q4 power consumption is forecast by the China Electricity Council to rise by at least 7% YoY, from 6.6% in Q3, 6.4% in the Q2 and 3.6% in Q1.

Which vessel sizes has China’s coal import surge benefitted most?

With year-on-year gains in Chinese coal trades driven by coal from Australia (after a long period of avoidance), Indonesia and Russia (more noticeable after the start of war in Ukraine), the chart on page 2 reveals which vessel sizes have benefitted according to each trade.

The return of Australian coal shipments is responsible for the clear majority of the Capesize gains, with shipments from Colombia, Russia (ex-Pacific and from terminals in the west of the country) plus the US making up most of the rest.

Australia and Indonesia accounted for the overwhelming majority of the Panamax gains, with shipments from Russia (mostly Pacific ports) a distant third. Indonesia dominated the Supra/Ultramax gains, with Russian Pacific terminals contributing much of the remainder.

However, Mongolian export capacity of (mainly coking) coal could expand further thanks to new rail links, constraining seaborne trade.

The start of the Tavan Tolgoi-Gashuun Sukhait Railway (Tavan T-GS Railway) in Mongolia in July 2022 coincided with the end of China’s Covid-related closures of border posts with Mongolia, which did much to lift overland coal exports to China.

Earlier this year, the Tex Report advised of a new 7km border rail link, the Shivee Khuren-Ceke Railway, to start in Q4 at the earliest, so adding to growth potential for overland exports in 2024, particularly of coking coal.

At the start of 2023, the Mongolian government set an export target for the year of 50m tonnes, but exports could well turn out to be more than 60m, a giant leap from 32m tonnes in 2022.

Turning to demand, the International Energy Agency (IEA)’s World Energy Outlook 2023 commented last month that, despite the attention the current property crisis attracts, energy demand and heavy industry in China appear “only modestly” affected.

Nonetheless, this is partly because the property crisis is impacting new projects, as opposed to those already under way.

Moreover, the IEA lists four further reasons for the resilience of energy demand despite the real estate downturn: (1) rapid electrification, (2) expansion of the “new economy,” such as the manufacturing of solar panels and electric vehicles, (3) rising petrochemical production and (4) droughts limiting hydropower.

Long term

The IEA’s report outlines two scenarios for China’s coal demand, both of which peak around 2025.

Under the Stated Policies Scenario (STEPS), demand declines to below 50% of the peak by 2050 at an average annual rate of 2.3%; whereas under the Announced Pledges Scenario (APS), the decline is far steeper.