BLUF
China’s coal embargo may have been intended to punish Australia, but it now appears it has been a very costly mistake on China’s part.Summary
Metaphorically speaking, China may have shot itself in the foot over its embargo on Australian coal. Every million tonnes of coal is now costing China’s steel mills more than US$400 million, compared with approximately US$250 million paid by steel mills elsewhere around the world. China’s ban on Australian coal purchases from around November last year caused huge distortions in the global coal market. The ban caused immediate pain in both China and Australia. Here are some of the outcomes:
The price for Australian coal plunged, while prices inside China jumped.
Suppliers from the United States and Canada that traditionally sold coal into Europe switched to China, where they could double their returns.
European mills turned to Australia, where they could get cheap supply.
China’s authorities assumed the loss of Australian coal would be made up comfortably by other suppliers and by their own reserves, but they were hit by a succession of supply shocks.
Mongolia replaced Australia as China’s largest source of supply but the Covid-19 pandemic forced the closure of coal truck routes which slowed supply to a trickle.
China obtains 88 per cent of its coal from domestic mines, but relies on imports both for quality and flexibility in meeting demand. The embargo on Australian coal may have ended up causing unforeseen problems for the Chinese economy.
References
Jun 2021 ABC Australia How Beijing shot itself in the foot with its trade war with Australia
Aug 2021 ASPI China’s coal conundrum
Sep 2021 SMH China’s ban on Australian coal has an expensive sting in its tail
