China set to resume Aussie coal imports, but Morgan Stanley doesn’t forecast a bump in prices

Mon 09 Jan 23, 2:08pm (AEST)
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Key Points

  • Australia-Sino relations thawing
  • China's ban on Australian coal set to be lifted
  • Morgan Stanley doesn't forecast a long-term lift in coal prices

Last month’s trip to Beijing by Australia’s foreign affairs minister, Penny Wong, was intended to thaw trade relations between the two countries. It appears to have worked, 

with Bloomberg reporting that China’s National Development and Reform Commission held talks last week on proposals to allow four major coal importers to resume purchases this year.

China currently produces roughly half the world’s low-grade coal, but it remains dependent on imported coking coal to feed its insatiable appetite for steel. Australia was the primary supplier of that coal. In 2019, China imported 20% of its thermal coal and 41% of hard coking coal from Australia.  

That all changed when China implemented an unofficial ban on Australian coal in 2020, widely seen as retaliation for Australian calls for an independent probe into the origins of COVID. 

Don’t bet on a long-term lift in prices

Following the ban, China quickly plugged the supply gap by importing its coal from Russia, Canada and Indonesia. 

Yet re-routing trade flows is expensive, which added a temporary premium to coal prices. 

“The delivered China hard coking coal price traded at a significant premium to its Australian equivalent in the year after the ban was implemented; the limited non-Australian cargoes out there had to be incentivised to be redirected to China, while it took a while for all Australian met-coal to be absorbed elsewhere,” notes Morgan Stanley. 

While trade normalisation may catalyse a short-term lift in coal prices, Morgan Stanley expect this sugar hit to be temporary. 

Premium met coal back to China

“We think it is likely that met-coal trade flows will revert and China's steel mills will buy premium quality Australian steelmaking coal again if allowed to do so, pushing Canadian and US met-coal back into its original markets,” says Morgan Stanley. 

“This could initially mean a stronger pull on Australian met-coal along with higher prices, especially if we also see some recovery in ex-China steel production, but this dynamic should fade eventually as trade flows revert/normalise.”  

Nonetheless, Morgan Stanley holds a bullish outlook on Australian coal miners in 2023, with Overweight ratings on South32, Whitehaven Coal, and Rio Tino.

Written By

David Thornton

Content Editor

David is a Content Editor at Livewire Markets and Market Index. He currently hosts The Rules of Investing, a half hour podcast where he sits down with leading experts across equities, fixed income and macro.

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