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China's shift towards overland metallurgical coal imports to dampen shipping demand
Drewry has analysed the potential implications of China’s strategy to diversify its coking coal import partners, which will have multiple implications on shipping. The burgeoning trade with Mongolia will curtail seaborne trade, while higher imports from Russia over Australia will dampen the tonne-mile demand. Massive potential trade growth is expected between Mongolia and China due to the commencement of the railway network between the two countries in 2023 and the construction of two additional rail networks underway.
China’s coking coal demand
China’s seaborne coking coal imports rose 5.3% YoY in January-April 2024, with total imports expanding by a much higher rate due to the uptrend in overland trade. The mining restrictions in the country have curbed domestic production, leading to a 3% decline YTD, while skyrocketing steel exports have counterbalanced the weak steel demand domestically, keeping imports of metallurgical coal buoyant. However, the surge in total metallurgical coal imports is attributed to the higher expansion in land trade compared to seaborne imports.
Emerging trends
While the demand for coking coal looks promising, the declining share of seaborne trade and the shift in trade patterns in the short term have critical implications for the global shipping demand. The expansion in overland trade from Mongolia and the tepid growth in imports from Australia will dampen shipping demand.
Figure 2: Share of trade partners in China’s coking coal imports
* Till April 2024.
Source: Drewry Maritime Research
China’s coking coal imports from Mongolia have been skyrocketing. The latter’s domestic production has been burgeoning, with production reaching 82 million tonnes in 2023, more than doubling from 39 million tonnes in 2022. More than 90% of the landlocked Mongolia’s production is transported to China, with the newly developed railway network easing trade. The commencement of the railway network between Tavan Tolgoi in North Mongolia and the Chinese border was the game-changer in 2023. Meanwhile, construction of two additional rail networks began in 2023, signalling massive potential growth in trade between the two countries in future.
Figure 3: Coal production in Mongolia
Source: CEIC
Furthermore, China’s seaborne imports from Russia have been strengthening, registering a growth of 97% and 24% in 2022 and 2023, respectively. This rise can be attributed to the unofficial ban on Australia’s coal in China. However, despite the resumption of trade between Australia and China in 2023, China imported merely 2.8 million tonnes from Australia, well below the historic average of 31 million tonnes during 2018-20. During January-April 2024, China’s imports from Australia remained subdued at only 2.6 million tonnes, signalling that the trade with Australia will not reach the pre-ban level in 2024.
Is the coal trade impacted?
Australia diversified its exports to other destinations when trade with China was suspended, with the share of India, Japan and South Korea rising in 2021. However, the country’s total coking coal exports have been on a downward trajectory since 2020, with a 6% contraction in 2023 despite the resumption of trade with China.
Australia’s exports contracted over the last three years, but the share being exported to other major trade partners has not changed significantly, indicating that the void created by China’s diversification of sources has not been filled through a shift to other destinations last year.
Figure 6: Share of trade partners in Australia’s coking coal exports
* Till April 2024.
Source: Drewry Maritime Research
Impact on shipping
The impact on shipping will be two-fold. First, if China’s lacklustre demand for steel dampens growth in imports of coking coal in 2024, the impact will be acute for shipping as China’s share of overland trade may rise instead of seaborne imports. Australian coal is more expensive, and China’s imposition of tariffs on metallurgical coal in countries without a Free Trade Agreement — which includes Russia (Australia has a Free Trade Agreement with China), may also dampen trade growth.
Second, China will diversify its imports, leading to a higher preference for Russian coal than Australian coal. For every tonne of coal switched from Australia to Russia, the tonne-mile demand may reduce 62%. This is based on Drewry’s analysis considering a shift in trade from Gladstone (Australia) – Caofedian (China) to Vanino (Russia) – Caofedian (China), decreasing shipping distance from 4,416 nautical miles to 1,645 nautical miles. The Capesize market will be the most impacted as most coal exports from Australia are shipped on these vessels.
Conclusion
China's strategic shift towards rail-based coal imports from Mongolia and increased reliance on Russian coal marks a transformative moment for the global shipping industry. The new rail networks and China's heavy investments in Mongolia signal a decisive move away from seaborne trade, drastically reducing the demand for long-haul shipping. As Chinese steel mills face tight margins and weak domestic demand, the preference for closer, cost-effective sources will continue to reshape trade dynamics.
This pivot not only undermines Australian coal's market share but also slashes shipping demand, particularly hitting the Capesize vessel segment. In the face of the US sanctions, China's unwavering appetite for Russian coal further cements this shift. The cumulative impact is poised to reshape global shipping routes, redefine demand patterns, and challenge the shipping industry to adapt swiftly to these seismic changes.
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