The Dragon's Black Gold: China seaborne coal import shows divergence in 1H24

The latest official customs data shows that China's coal imports hit a record 249.6mln mt in 1H24, an astounding 11.9% year-on-year increase. The total import volume of thermal coal reached 192mln mt, which is 9.0% higher than the 176mln mt recorded over the same period in 2023. The total import value of China's thermal coal stood at $16bln, a 15.8% decrease year-on-year as prices fell to an average of $83.34/t, a y-o-y decrease of 22.7%.

The significant year-on-year increase in the volumes is largely due to the relatively stable import margin. Domestic thermal coal is not able to compete with imported coal, therefore domestic coal is less economic and backed out by the imported.

In this context, market players have gradually tuned up their annual coal import projections from the initial expectation in February of 400mln mt (of which thermal coal accounted for around 310mln mt), to current forecasts of around the 500mln mt mark (of which thermal coal is projected to total about 390mln mt). In 2023, total Chinese coal imports at 474.5mln mt, of which thermal coal accounted for 78.4% of the volume at 372mln mt.

When examining these imports on a country-by-country basis, despite the double digits surge in coal import volumes on the year, the divergence in volumes among various regions within China is noteworthy. Breaking down the country into three general regions of ‘North China’, ‘South China’ and ‘CJK’ (short for ‘Changjiangkou’, which covering ports along the Yangtze River Delta). According to data from AXSMarine, the import volume in North China fell by 1.3mln mt (-3.5%) to 36.8mln mt compared to last year. In contrast, seaborne import volumes in South China and CJK saw a significant increase, with year-on-year gains of 16.4mln mt (13.4%) and 2.4mln mt (5.6%), respectively.

In this context of overall growth in seaborne coal import volumes, there are arguably three key reasons for the decline in import volumes in North China:

  1. Indonesian coal is unprofitable in North China

  2. Lower railway cost in China supports domestic coal sales

  3. Mongolia has boosted its coal production and exports

1.       Indonesian coal unprofitable in North China

For coal buyers in North China, due to their proximity to China's domestic key mining regions of Shanxi, Shaanxi, Xinjiang, etc., purchasing domestic coal delivered overland can save them seaborne shipping costs. The average cost in 2023 for cabotage trade from North China to South China was $4.60/t. Moreover, if buyers choose to import coal from Indonesia, buyers in the North have to pay a higher cost due to the longer seaborne sailing distance, which is about 50% longer than to South China. Additionally, due to the less favourable open position of ships in North China, where it is more difficult to secure the next loading stem, shipowners often ask for higher rates to compensate for the difficulty in obtaining their next voyage. For example, based on a 76,000 Dwt LME, basis the loading port of Samarinda in the Indonesian province of East Kalimantan, the average freight difference in 2023 between a stem discharging at Dalian (North China) and Putian (South China) stood at $2/t. Thereby buyers in North China who stuck to Indonesian import business suffered a total profit loss of $6.6/t compared to South China importers. Accordingly, the total price difference significantly reduces the willingness of buyers to purchase thermal coal from Indonesia, especially against the backdrop of a general decline in coal prices and narrowing profit margins this year.

2.       Lower railway cost support domestic coal sales

Since the end of April, several local railway bureaus in China have announced preferential policies for coal freight, lowering associated freight rates by 10-30% based on cargo volume. This is seen as a measure to stimulate demand for coal transportation during the traditional ‘low demand’ season. This policy supports the government’s shift from truck to railway, as the government encourages the use of railways to transport of goods in order to reduce carbon emissions. In addition to a practice of tax and fee reductions, it is expected to boost cargo transportation when the demand is low. Although the discount varies by region and there are restrictions on the time span of the preferential policies (mainly from April to June), the policy is expected to have a positive effect on the marginal coal transportation volume. According to CNCA (China National Coal Association), following the implementation of the policy at the end of April, the railway transportation volume of coal, after a year-on-year decline in April, achieved a monthly increase in volumes shipped in May and June, which were 234 mln mt and 230 mln mt, respectively.

3.       Mongolia continues to boost coal production

China is the sole importer of Mongolian coal and mainly receives coal from Mongolia via truck and railway. According to the latest data from Mongolian Customs, during 1H24 total coal export volumes reached 39.4mln mt, which is an increase of 39.1% and 11.1mln mt year-on-year. Due to the proximity and higher freight costs for seaborne transportation, the major distribution radius for the delivery of Mongolian coal is concentrated in North China. Therefore, it is often seen as a supplement to domestic coal within the region. The continuous rise in Mongolian coal production and uptick in export volume has also further reduced the competitiveness of seaborne coal imports to northern Chinese ports. Furthermore, logistical bottlenecks have been removed after improvements in railway infrastructure between China and Mongolia and the wider application of AGVs (Automated Guided Vehicles). This has built a solid foundation for Mongolia to continue to increase its exports to China in the future. Mongolia is expected to export around 70mln mt of coal to China in 2024, of which 15mln mt is considered to be thermal coal.

In sum, amid the record-breaking volumes of China's seaborne coal imports and the resumption of shipping over the past 18 months post-lockdown, many underlying issues have been resolved. The abovementioned phenomena are likely to persist and lead to a more fragmented Chinese coal market in the future, particularly for Indonesian seaborne coal trade in the Pacific market. Vessels loading in Indonesia may expect to source demand to discharge north of CJK and the Yangtze River. Conversely, vessels in Russia lack the positional advantage to cover the demand from the market in South China. Therefore, shipowners in the Pacific market are expected to have less options in the future. Moreover, if China struggles to absorb the coal import volumes, shipowners may find themselves with less optionality in the Pacific.