Peter Ker and Michael Smith
The idea that China could stop imports of thermal coal during the first six weeks of northern winter would have been unthinkable just two years ago.
But unconfirmed reports on Friday that the Chinese government does not allow further imports of coal in 2018 is just another sign of the changes that Australian exporters experience in the wake of China's determined effort to reduce air pollution in the colder months.
Thursday marked the effective start of winter in China, when the state's warming began to pump into the homes of people, especially in Beijing and the nation's north.
Australians who live in Beijing, who became accustomed to blue skies, complained about the bad air quality in the capital this week, with some of them sending pictures on Twitter of a thick gray booklet that encloses the city's skyscrapers.
Winter has taken a special significance for Australian companies exporting energy products (mainly liquid natural gas and thermal coal with energy content of 5500 kilocalories per kilo) to China, as the intersection put tough operating limits at factories and heavy industry in 26 cities in winter.
These cuts were designed to limit power consumption and industrial pollution but expectations that they would trigger a seasonal fall in demand for Australian thermal coal proved wrong when a colder than expected winter and lack of fuel gave additional demand and a 15 percent increase in coal prices between November 15, 2017 and February 2, 2018.
Chinese demand for LNG also increased last winter and took prices from about $ US5 per million British thermal units to about $ US11 per unit.
Industrial limits extended
Winter borders have been extended to 82 cities this winter and the Chinese authorities have made great efforts to connect more homes to the grid before winter to reduce domestic burn of low-quality fuels.
They have also directed power generators to change their purchasing habits, with larger stocks of coal and LNG built before this winter.
"In order to prevent winter price increases, power-producing companies (GenCos) have introduced a strategy for building high stocks. The list of key state power plants has now reached a record high of 90 million tonnes of coal, which is over 30 days of consumption," said Wood Mackenzie's Beijing-based analyst Zhai Yu.
"The six major GenCos in the coastal region have stocks of 33 days of consumption as of November 14, which is also record high. Therefore, GenCos has a small requirement to buy coal on the market. Some GenCos have also had to cancel some contracted volumes recently because they have ran out of the warehouse. "
The proposal that Chinese customers intentionally increase coal purchases during the traditionally weak "shoulder" season between the summer and winter peaks fits with reports from Australian coal miners like New Hope, who pointed out in September that demand was stronger than normal for the shoulder period.
Woodside CEO Peter Coleman said China had made similar changes in its LNG purchasing habits.
"You see a bigger shoulder during the period, so basically is the period in which China begins to buy, earlier and it goes through later in the season," he said later on by the Melbourne Mining Club this week.
"China learned from last year, last winter that the peak of market demand really distorts the market, it distorts prices, meaning that they could not get gas to consumers in China during the winter's peak.
"I can see this year they have worked through it … they have plotted some of that demand.
"The total [demand] increases but the vertex has gone out of it. "
Zhai said that this Chinese winter was tipped to be warmer than last and he predicts that thermal coal demand for heating could be 50 million tons lower than last winter.
"We think that [coal] The market will be switched from the over offer in the fall [October and November] to tight delivery in winter. But coal prices will not be rocketed as last year, he says.
"The high inventory strategy, lower expected demand and increased imports in January will cause the carbon price to vary between RMB600 per ton ($ US86 per ton) and RMB 630 per ton ($ US90 per ton) in the winter."
Australia's coal exporters will closely look at the longevity of China's coal import curbs, especially in the unlikely event that they expire beyond December 31st.
"We understand that GenCos has booked large volumes of import coal for delivery in January when there is no import quota problem and some of their stocks are consumed. We estimate that seaborne thermal coal imports will be over 20 million tonnes per month in the first quarter of 2019," said Zhai .
"Coal prices may increase if China holds restrictions on imports of coal in (first quarter) 2019."
Coleman said that demand for LNG imports in February and March should be ready before Christmas.
"Cargoes for February really need to be purchased in December, so in December we will begin to see how (customers) feel they are located," he said.