Coal imports into China have the potential to increase in 2021 as compared to this year as domestic coal prices are at a very high level, but this needs a policy change from the Chinese government, according to Torvald Klaveness. China usually restricts imports of coal to help domestic miners through a wider effort to reduce the fuel dependency of the country. They do this by enforcing coal import quotas on a yearly basis.

For a nation that consumes and produces half of the world’s coal, the strength of China’s import curbs may vary based on the competing priorities to protect domestic miners or power plants. The Chinese government has defined a green zone for coal prices ranging from Yuan500 ($75.8) to Yuan575 per tonne for the benchmark price. In this green zone the domestic coal producers and the domestic thermal coal plants are profitable. They have further defined a yellow zone and a red zone. When prices are in the red zone it will usually trigger a change in policy from the Chinese government.

This year, coal loadings to China started at very strong levels. In the first three quarters of the year, China imported 197.8m tonnes of coal, a decline of 2.5% compared to the 202.8m tonnes imported in the same period of 2019, but still higher than the 181.1m tonnes imported in 2018 and the 178.3m tonnes in the same period in 2017. However, energy demand this year was negatively impacted by the coronavirus outbreak. As a result, domestic coal prices fell quickly and moved into the lower red zone which triggered a policy response where import quotas were strictly enforced, head of Klaveness Research Peter Lindström noted. The consequence has been a sharp reduction in coal loadings to China since July.

Coal loadings to China in September and October are the weakest in five years and are down 44% from the same period last year, he said. The very low imports in the second half of the year have brought year-to-date coal loadings down 11% compared to last year. Still, a combination of curtailed supply and rapidly improving energy demand has led to surging domestic coal prices, which are now in the upper red zone.

“The arbitrage on coal imports are huge and the only limiting factor for imports to China today is the lack of import quotas,” Mr Lindström added, suggesting that the high domestic coal price will trigger a softer stance towards imports in the coming months.

In recent years the coal import quotas have been renewed at the start of each calendar year. “Given that the coal price currently is in the red zone we think it is unlikely that this renewal practice will be changed. We believe coal loadings to China will increase in November and December even in the absence of new quotas for 2020.”

The reason, he said, is that the current arbitrage on coal imports is enough to cover the demurrage for a vessel waiting to discharge for up to six months. Thus, traders are incentivised to load the coal today at low international coal prices and discharge in China in the new year when quotas are renewed.