China ban more musical chairs than Death Of Coal

China’s effective ban on Australian coal since October is more political retaliation than climate statement and may have ended up as a bit of an own goal. While the ban has contributed to widespread Chinese blackouts during freezing winter snap, Australia’s coal exports have just shifted to new markets as prices continue to surge in the second half of 2020.

In mid-December the New York Times breathlessly announced that China was forcing Australia to conclude that “the coal era is coming to an end“, followed by a northern hemisphere cold snap that send energy demand through the roof and thermal coal prices north of USD$62 a tonne, their highest since mid-2019.

Multiple media sources reported chronic blackouts in cities across China caught out by a spike in demand from post-COVID industrial activity, the sharp downturn in temperatures and thermal coal shortages used to make electricity, a direct result of its Australian coal ban. The ban itself was not climate related, but reportedly in retaliation for The Australian Government calling for an investigation into the origins of the corona virus.

Strong demand fuelled record coal prices in 2019 prompting increased production from major exporters which softened prices ahead of the COVID-19 pandemic in March 2020. Prices fell sharply in line with soft global energy prices, but have recovered through the altercation between the world’s biggest coal producer and consumer (China) and the biggest exporter (Australia).

In a global game of musical chairs, China’s demand for coal imports has switched its supply from Australia to Indonesia, with Australia increasing supplies to Indonesian markets in India. The shortage of coal in China has pushed prices up there too, despite a tripling imports from Indonesia in December.

Cold weather and growing demand increased demand for Australian thermal coal from Australia’s two biggest export markets, Japan and Korea, holding the Newcastle index price above $80. That doesn’t look like the end just yet.

That’s the tactical problem with banning a commodity: it triggers a re-adjustment of supply chains rather than an economic cost. Coal markets are likely to be the best indicator of a meaningful global shift away from coal fired electricity, reflected in a gradual, sustained softening of prices matched by the closure of the least economic mines. That day may well be coming, but it’s not today.