Unravelling the China-Australia coal trade mystery - Milford Asset

Unravelling the China-Australia coal trade mystery

Greg Cassidy

Senior Analyst

Greg is a Senior Analyst based in the Sydney office focussing on Australian equities. Prior to joining Milford in October 2016, Greg spent over a decade as a Senior Analyst at Tribeca Investment Partners in Sydney following two years at AMP Henderson. During his career, Greg has covered many sectors including resources, energy, banks, utilities, steels and building materials. Greg has a Bachelor of Economics (Hons) from the University of Sydney, a Postgraduate Diploma in Applied Finance and Investment from the Securities Institute of Australia and is a CFA Charterholder.

In February, press reports started to emerge of China restricting the importation of Australian coal. Ships loaded with Australian coal were finding it hard to get clearance to dock at ports like Dalian. At the time there was much uncertainty as to how much was being banned outright and how much was just short-term delays in the usual clearance times.

One possible explanation was an attempt by the Chinese authorities to help local coal miners who were struggling to compete with imported coal. Since most of the focus was on Australian imports, thoughts moved to whether it was in retaliation for Australia banning the Chinese communications giant Huawei from the roll out of the local 5G network. Australia was following the lead from the US and as part of the Five Eyes alliance to announce the Huawei ban. So, was China using its size as an economic weapon?

Let’s look at the data as shown in the chart below which has monthly coal imports since January 2017. Australian tonnes are in green with the all other countries in red. Imports were very high in January after a soft December with most of it explained by a lift from Australia. February then saw a big drop with some of this explained by the import restrictions on Australian coal. Some companies possibly affected were BHP and Whitehaven Coal.

Source: General Administration of Customs (China), UBS

Why are things so volatile?

China produces most of its coal needs and tends to only import when prices are favourable to do so. During recent months, we have seen some Australian coal cheaper than similar Chinese coal but some dearer. Yet, we have seen similar trends each month so maybe politics did play a part? Were the restrictions a way to teach Australia a lesson as a ban on Australian coal would hurt Australia more than China? Officials from both countries publicly denied such suggestions.

It does appear given the drastic change in imports that there was a particular focus on all Australian coal regardless of price. China’s policy has been both protectionism for its local coal mines and at the same time, send a message to Australia of China’s growing clout and their unhappiness with the Huawei ban.

As usual with China, things are rarely black and white and March data should be out soon with anecdotes suggesting imports have picked up. But it does illustrate the risks for small trade dependent countries like Australia and New Zealand. It’s possible we’ll see impacts on other exports like tourism, milk or education as China’s rise on the world scale continues.  At Milford, we are now more acute to these risks – which is why we continue to monitor these developments very closely.

Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances. It is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser. Please note past performance is not a guarantee of future performance.

Disclosure of interest: Milford Funds Ltd. holds shares on BHP Group on behalf of clients. 

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