Whatever the reasons for China's curbs on imports of Australian coal, it is safe to say that economics are not among them. Beijing's ban even seems to be indirectly benefitting the finances of its leading raw material supplier, despite the continuing political fallout.
China has imposed curbs on imports of coal and other products from Australia since earlier this year, in what appears to be a politically driven attempt to punish Australia's stance on a range of issues from Chinese investment to the Covid-19 pandemic. It certainly makes little economic sense for Beijing to ban Australian coking coal, particularly the higher grade hard coking coals, without which its steel industry operates less efficiently and is forced to use more Australian iron ore to produce each tonne of steel. This is helping to push the price of iron ore to nine-year highs, increasing costs within China and more than offsetting coking coal losses to Canberra's budget by boosting taxes from the more lucrative iron ore industry.
A good proxy for the Australian government's budget is the financials of UK-Australian mining firm BHP.
BHP is the world's largest supplier of seaborne coking coal through its BHP Mitsubishi Alliance (BMA) and BHP Mitsui Coal (BMC) joint ventures in Queensland. It is the world's third-largest supplier of iron ore behind UK-Australian firm Rio Tinto and Brazil's Vale.
A $58/t fall in the average coking coal price received by BHP in its financial year to 30 June 2020 compared to the previous year resulted in a $1.79bn reduction in earnings before tax, interest, depreciation and amortisation (ebitda). By comparison, an increase of just $13/t in the iron ore price in 2019-20 compared to the previous year resulted in a $3.46bn increase in ebitda, more than offsetting the decline from lower coking coal prices.
So BHP and by proxy, Canberra's treasury, will have benefitted far more from iron ore's price rise — to $175/t cfr China in late December for 62pc Fe from $99/t at the start of July — than it will have lost from a decline in premium hard low-vol coking coal prices, which dropped to around $100/t fob Australia from $115/t in the same comparison.
The average price for 62pc Fe iron ore was around $125/t for July-December while hard coking coal averaged $110/t, according to Argus assessments. This means BHP would increase ebitda by over $6bn, with a $7.5bn increase in iron ore ebitda more than offsetting a $1.4bn decline for coking coal, if these average prices persist for the rest of the 2020-21 financial year and exchange rates and other commodity prices remain the same as in 2019-20.
The Australian government's commodity forecaster expects the value of the nation's iron ore exports to rise to a record A$123bn ($93.7bn) in 2020-21 from A$103bn a year earlier, and the value of metallurgical coal exports to decline to $22bn from $34bn, with the increase in iron ore, again, more than offsetting any damage China is causing to coking coal. This offset will not be spread evenly through the Australian states, with Western Australia gaining most from increased iron ore royalty payments, while the more populous eastern states of Queensland and New South Wales stand to lose from lower coal royalties.
On a national level, the basic economics of steelmaking have done much to persuade Australia's coking coal suppliers that China will relent in its import ban in the new year, as new quotas are released for 2021. The concern is that politics will trump economics and that Beijing will be prepared to continue the ban despite the cost to send a message to Australia.
Source : https://www.argusmedia.com/en/news