There are reports that China has banned Australian coal exports from entering a major northern Chinese port, and investors are more than a little worried that it could lead to an escalating in tensions between the two nations.
According to Reuters, the port of Dalian has slapped an indefinite ban on Australian coal imports, a move that follows separate reports of delays in Chinese customs clearing Australian coal imports at other major ports.
Five harbors overseen by Dalian customs — Dalian, Bayuquan, Panjin, Dandong and Beiliang — will not allow Australian coal to clear through customs, Reuters said, citing information from a port official.
The blanket ban, introduced at the start of the month, appears to only target Australian coal imports with those from Russia and Indonesia not impacted, according to the official.
In response to the report, Geng Shuang, a spokesman at China’s foreign ministry, suggested China was not deliberately targeting Australian coal, telling reporters on Thursday that it reflected “inspecting and testing coal imports for safety and quality”.
“The goals are to better safeguard the legal rights and interests of Chinese importers and to protect the environment,” Geng said, adding the move was “completely normal”, according to Reuters.
A report from consultancy firm Wood Mackenzie said Dalian customs accounted for 7% of China’s total coal imports in 2018, including both thermal and coking coal cargoes.
Like Geng, senior officials in the Australian government attempted to hose down investor concern about the potential for an escalating in trade tensions between the two countries.
“I’m aware of unconfirmed and unsourced media reports and have asked our ambassador in Beijing to urgently clarify their veracity,” said Simon Birmingham, Australia’s trade minister on Thursday.
“We continue to engage closely with industry on matters of market access … China is a valued partner of Australia and we trust that our free trade agreement commitments to each other will continue to be honored.”
Treasurer Josh Frydenberg also cast doubt on whether Australian coal imports had actually been banned by China.
Asked earlier today whether Australian imports into Dalian had been banned, Frydenberg told ABC Radio that “they haven’t”.
“Well, I wouldn’t jump to conclusions,” he said. “The Australia-China trading relationship is exceptionally strong and exceptionally important”.
Frydenberg also dismissed the view that Australia was being targeted in retribution for the the government’s decision to ban Huawei Technologies, a leading Chinese telecommunications firm, from supplying equipment to build Australia’s 5G broadband network.
“No we’re not. We have a very strong relationship with China and it’s based on mutual respect and mutual interest,” he told ABC Radio.
RBA Governor Philip Lowe also cautioned about jumping to conclusions about the report.
“I wouldn’t jump yet to the conclusion that this is something that is directed at Australia. We have to wait and see,” Lowe told parliamentarians in Sydney today.
“The background is really developments in the Chinese steel industry. The authorities have been trying to contain production of steel for environmental reasons and they’ve had difficulty in doing that.”
Lowe also expressed doubts that the ban will have a large impact on the Australian economy.
“My understanding is that the amount of coal that is being blocked is the total of two months exports from Australia to China,” he said.
“If that’s all we’re talking about, the blocking of a couple of months coal exports, then that’s not going to derail the Australian economy.”
Not everyone is convinced these developments can be easily dismissed.
The rationale behind the ban on Australian coal at Dalian customs is unclear,” said Vivek Dhar, Mining and Energy Commodities Analyst at the Commonwealth Bank.
“The narrative that China is just tinkering with its coal policy, like it has done previously over the last few years, is beginning to lose credibility.”
Dhar said the specific targeting of Australian coal imports “raises the concern that political motives could be at play”.
“If the import ban on coal spreads across China, we could see Australia’s export volumes and realised coal prices come under significant pressure,” he said.
“China accounted for 22% and 24% of Australia’s thermal and coking coal exports last year.”
Ivan Colhoun, Chief Markets Economist at the NAB, shares a similar view to Dhar, suggesting that while Australian coal imports into Dalian are relatively small, a broader ban it would have a significant impact on the Australian economy.
“At 1.8% of Australia’s total thermal and coking coal exports, the Dalian move is small,” he said.
“If this move is the start of a more significant deterioration in the trade relationship between the two nations, it could of course have more important impacts on Australian markets, trade and economic activity given China is Australia’s largest trading partner, taking around 34% of total exports.”
Despite the potential risks, both Dhar and Colhoun expressed doubt as to whether the ban — if there is indeed one — will continue beyond the near-term.
“We don’t think a Dalian Customs ban or a China wide ban on Australian coal will be sustainable beyond a few weeks or months,” Dhar said.
“Firstly, it could not have come at a worse time for China’s steel mills. Not only are Chinese steel mill margins weak, but iron ore prices are surging exactly when construction season is set to begin following the Chinese New Year period.
“Secondly, Australian thermal and coking coal is higher quality than other available varieties, usually resulting in stronger productivity and lower emissions for end users. A policy to restrict or ban Australian coal imports ultimately compromises China’s environmental protection agenda.
“Finally, it violates Australia’s free trade agreement with China. Given the US China trade talks and the impending March 1 deadline, it would seem unlikely that China wants more on their diplomatic plate.”
Colhoun also points out that while China has some serious clout in commodity markets, targeting Australia may not be in its best interests.
“While China has considerable muscle in thermal coal markets given its substantial domestic production of thermal coal, it remains very reliant on Australia [for] iron ore and coking coal, especially iron ore in the near term given supply disruptions in Brazil,” he says.
“Given China’s reliance on Australian commodities, it seems unlikely that in the long-term both countries won’t have a significant trade relationship.”