Coking coal defies China bid to keep control of commodity costs

The price of a key raw material for China’s vast steel making industry has soared even as Beijing tries to rein in runaway commodity prices.

High quality coking coal delivered to China has risen above $300 a tonne for the first time since 2017, up almost 150 per cent since October, due to a supply squeeze that has left steel mills scrambling and paying a much higher price than international rivals.

The price surge underlines the difficulties China faces trying to cool red hot commodity markets, which it has identified as a key risk to its economic recovery, and its foreign policy goals.

China is relatively self-sufficient in coking coal, unlike in most other commodities, with domestic mines supplying about 80 per cent of its needs. But the scale of its steel industry means that it still imports about 65m tonnes a year of the steelmaking ingredient.

A large chunk of that total used to come from Australia. Then in October, Beijing placed an unofficial ban on coal imports from the country because of a diplomatic row with Canberra over the origins of the coronavirus crisis.

“Removing Australia from the picture last year significantly reduced coking coal imports into China and the numbers reflect that,” said Julien Hall, Asia metals pricing director at S&P Global Platts

Between January and May this year, China imported 18.2 tonnes of coking coal from all destinations, down from 31.7m tonnes in the same period in 2020, according to S&P.

At the same time, domestic coking coal production has fallen, under pressure from safety and environmental inspections, which increased ahead of the 100 year anniversary of the Communist Party on July 1.

“With 30 to 40 per cent of output restricted in key Shanxi production hubs, and the Mongolian border closed, domestic coking coal prices in China continue to rise,” said Colin Hamilton, analyst at BMO Capital Markets. Mongolia is another major supplier of coking coal to China.

So far there has been little sign of soaring coking coal prices being a close focus of policymakers in Beijing. However, that could change as prices continue to move higher.

Rising prices for iron ore — another key steelmaking ingredient — has taken most of the attention. Earlier this week, China’s top economic planning agency, the National Development and Reform Commission, said it would investigate “malicious speculation” on domestic iron ore trading platforms and “severely punish” any wrongdoing.

There have only been three other occasions when Chinese coal coking imports have traded above $300 a tonne. The most recent was in 2017 after a cyclone disrupted Australian supplies.

“Given the price trend, it would not be unreasonable to assume that Chinese steelmakers would be relieved to see an opening of the import market,” said Hall.

Analysts said the Australian import ban is a key reason Chinese steelmakers have been paying so much more for coking coal than international rivals. India’s import price including the cost of freight is about $205 a tonne, whereas China’s is almost $100 higher, according to S&P Global Platts.

However, the boycott of Australian supplies has been a boon for North America coking coal producers, which have dramatically increased sales to China.

In May they shipped 700,000 tonnes to China, up from just 1 tonne in the same month a year earlier. Miners in Indonesia, Colombia and Mozambique have also upped their exports to China.