Australian Coal Strength

Australian coal shipments recorded a 7% increase in the year-to-date to 173.8 Mt from the same period last year. This strength occurred both before the energy shock at the end of February, caused by the closure of the Strait of Hormuz, and after.

Coking coal export growth in the first five months of the year (+8% to 59.6 Mt) was driven by growth to Japan (+14% to 13.0 Mt) and China (+71% to 4.2 Mt). While facing higher input prices, Japan has recorded solid steel production, with the S&P PMI for the country indicating expansion for the sixth consecutive month. However, the lift in coal from Australia came along side lower longer haul shipments from Canada to both Japan and China.

Indirectly, Australian exports have benefitted from the recent energy shock, as their cargoes become more attractive for Pacific locations than Atlantic sources due to increased freight costs. Bunker prices surged after the onset of the closure of the Strait of Hormuz, with the VLSFO average in March 83% higher month-on-month at
$901.74/t, according to BunkerEx data. The price has softened since but remains elevated at an average of $640.50/t in July so far. This year, global average laden distances for the coal trades peaked in February and have since declined to a year-to-date low in June.

Elevated Australian coking coal shipments into China may also be supported in the coming months due to lower domestic production following the fatal coal mine accident in late May, which highlighted overcapacity in the system and shut down mines. As of July 8, 98 mines (with a total capacity of 134.95 Mt) had resumed production, while 73 mines (with a total capacity of 95.65 Mt) remained shut, according to MySteel.

Looking further ahead, China is committed to cutting overcapacity in its production sector, which will likely cap growth in steel production and thus coking coal imports.

However, other SEA countries have recorded a steady increase alongside India, representing a growing market. Australia’s Resources and Energy Quarterly (REQ) report notes that despite India’s sizeable coking coal resources, the country is heavily dependent on the import market, as India’s coal generally does not meet domestic steelmakers’ requirements. Though Indian demand is expected to increase, the price is projected to remain stable as additional Australian supply comes online in 2027 and 2028 — supporting seaborne volumes.

Australian thermal coal exports climbed 6% year-on-year to 80.0 Mt in the Jan-May. Shipments have increased to Japan (+12% to 27.8 Mt), Taiwan (+34% to 8.8 Mt),
South Korea (+115% to 8.1 Mt), supported by the energy shock with gas-to-coal switching and energy security concerns. Both Japan and South Korea lifted caps on coal-fired generation following the Hormuz energy shock. However, shipments to China dropped 22% to 19.3 Mt, with large declines after the onset of the war as elevated coal prices closed the coal import arbitrage window, instead turning to domestic supplies.

Going forward, a protracted closure of the Strait of Hormuz and further depletion of state oil reserves may negatively impact coal miners. Australian miners remain at risk to diesel shortages, with the country a significant importer. Though, continued disruption to LNG supplies also supports gas-to-coal switching. A hot summer in Asia could also drive up demand significantly, with the potential to reopen the Chinese import arbitrage window.

Longer term, Japan remains committed to nuclear and renewable energy with the goal of cutting thermal power from around 70% currently to 30-40% by 2040 before reaching net zero by 2050, according to the REQ. Similarly, South Korea has committed to cut unabated coal-fired power by 2040. China has had sharp renewable capacity growth while also prioritising its own domestic coal production for security of supply.