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Reuters reported on Thursday that customs at the Chinese port of Dalian has banned imported Australian coal since February, and will "cap overall coal imports from all sources to the end of 2019 at 12 million tonnes." It also said that major ports elsewhere in China prolonged clearing times for Australian coal to at least 40 days.
On Friday afternoon, the Australian dollar eked out slight gains to trade at $0.7101 at 2:55 p.m. HK/SIN, up from an earlier low of $0.7081. Local coal stocks mostly sold off. Shares of BHP fell 0.42 percent, Whitehaven retraced losses to gain 0.66 percent, Yancoal declined 2.8 percent and New Hope Group tumbled 3.55 percent.
Market speculation suggests Thursday's report may be a reflection of strains in the political and trade relationship between Australia and China in recent times, Ivan Colhoun, chief economist for markets at the National Australia Bank, said in a note. He added that the reported ban would affect a relatively small portion of the country's coal exports.
Last year, Australia banned Chinese telecommunication companies Huawei and ZTE from selling 5G technology equipment in the country, citing national security concerns. More recently, Australia rescinded the visa of a prominent Chinese businessman.
Colhoun pointed to data from the Australian Bureau of Statistics, which showed that in 2018, the country exported about 386 million tonnes of thermal and coking coal — the latter is a key component in steel production. Exports to China accounted for 22 percent of the total and Dalian port received only 1.8 percent of Australia's total coal exports, according to the bureau.
"At 1.8 (percent) of Australia's total thermal and coking coal exports, the Dalian move is small. If it were to extend to all Australian coal exports to China it would be a bigger issue for the coal market, but would still be relatively small as a share of total exports," Colhoun said, adding local producers could just sell their products elsewhere on the global market.
Still, he said, it may have a major impact on the domestic economy if the ban signaled the start of deteriorating trade and political ties between Canberra and Beijing.
Officials from both countries downplayed suggestions of a worsening bilateral relationship.
Australia's Prime Minister Scott Morrison, Treasurer Josh Frydenberg and Reserve Bank Governor Philip Lowe warned against jumping to premature conclusions over the ban.
When asked if the Dalian move was related to increasing tensions, a spokesman at China's foreign ministry said customs were inspecting and testing coal imports for safety and quality, according to Reuters.
The narrative that China is only tinkering with its coal policy, like it has done previously, is beginning to lose credibility since the ban appears to be particular to Australia, according to Vivek Dhar, associate director for mining and energy commodities at the Commonwealth Bank.
"The targeting of Australian coal raises the concern that political motives could be at play. If the import ban on coal spreads across China, we could see Australia's export volumes and realised coal prices come under significant pressure," Dhar wrote in a morning note.
He added that it's unlikely the ban on Australian coal will be sustainable beyond a few weeks or months because of its impact on China's steel mills as they struggle to find viable alternatives in the short- and medium-term.
"Not only are Chinese steel mill margins weak, but iron ore prices are surging exactly when construction season is set to begin following the Chinese New Year period," he said. "Australian thermal and coking coal is higher quality than other available varieties, usually resulting in stronger productivity and lower emissions for end users."
Such a ban would also push domestic prices higher in China.
Short-term replacements for banned Australian coal would be hard to find domestically and ultimately, Chinese steel makers would see much costlier coke blends, according to Robin Griffin, research director at global consultancy Wood Mackenzie.
That said, some analysts questioned the veracity of the Reuters report, suggesting that recent restrictions and quotas on Chinese coal imports "have been misconstrued."
"Our channel checks so far suggest while there are delays in getting imported coal, it is still getting through. This has been confirmed by our own conversations with buyers in China," Daniel Hynes and Soni Kumari from ANZ wrote in a note.
These restrictions are not new, according to the analysts.
"Chinese authorities have been adjusting import quotas for some time, in an effort to balance domestic and international coal consumption. The restrictions have been in place for several months now, as inventories and prices spreads have been hurting Chinese domestic producers," they said.