An unexpected announcement from Beijing last weekend stating that it is banning coal imports from North Korea is causing quite the ruckus in China’s coal market, traders are scrambling for supplies of coal which is used in steal-making and heating.
Last year China imported 22.5 million tons of coal from North Korea, representing 12.3 percent of its overall imports, according to BMI Research. Coal is a key export for the isolated nation in the Korean Peninsula.
The prices of steel and coking coal are rallying this week as mills struggle to meet the shortfall of 22 million tons should the ban be fully enforced.
On Tuesday morning, the most active steel rebar futures on the Shanghai Futures Exchange and coking coal futures on the Dalian Commodity Exchange were both up about 3 percent, extending gains of 2 percent on Monday.
The ban will be a net positive for coal prices, said BMI’s global commodities strategist, John Davies.
“It would be a material net positive for seaborne coking coal prices… The need to source this coal from elsewhere would boost demand for imports from countries including Australia and Mongolia,” the London-based analyst said.
Traders and steel mills in China are searching for alternatives for coking coal, according to Reuters report on Monday.
The ban will help to increase demand for China’s own coal production, but it will also pressure Beijing to find other sources for thermal heating. The country is currently struggling to clean up air pollution which has become quite the controversial social and political topic.
“Chinese authorities appear to be strongly committed to their goal of closing outdated coal mines and boosting clean energy. In this regard, the ban on North Korean coal imports has the potential to further stimulate China’s energy transition,” said FocusEconomics senior economist Ricard Torné .
Although there will be a short-term upswing in prices, skepticism over the enforcement of the ban remains as China can still import North Korean coal as the United Nations Security Council resolution on sanctions against Pyongyang include a humanitarian exemption.
“In 2016, China had already banned imports from its nuclear-power-holding neighbor though it made expectations for shipments intended for the ‘people’s well-being’ and not related to the missile programs, which, in practice, allowed North Korea to keep its supply of coal flowing,” Torné added.
Article written by HEI contributor Lydia Ezeakor.