Target $4.61, page-1926

CBA China Economic Update 7th September -

China’s coal imports lifted by 36%/yr, but declined 7%/mth in August. Imports were down 15% compared to July 2019, signalling that imports are tracking below pre COVID levels. The year on year rise in China’s coal imports in August likely reflects the impact of China’s coal import quotas in H2 2020. The month on month fall in coal imports highlights the struggle to find coal from abroad.
The month on month decline is notable because policymakers have already relaxed import quotas to address the tightness in China’s coal market. While a more detailed breakdown of China’s coal imports will be released later this month, we suspect that imports from Indonesia and Mongolia were adversely impacted last month.
Policymakers in Indonesia have suspended exports from a number of local coal miners because they failed to sell 25% of their production to the domestic market. This policy has been put in place because Indonesia’s coal market has tightened. Mongolian coal exports to China have been hampered by COVID 19 restrictions, resulting in the border being shut from August 23 to August 29.
China’s unofficial ban on Australian coal and constrained local supply (care of mining accidents) have resulted in soaring local coal prices. Chinese thermal coal prices were tracking at RMB 942/t on August 30 (5,500 kcal/kg, Net As Received (NAR)), well above China’s target range of RMB 500 570/t. Rising coal prices highlight China’s struggle to balance growth and emission cuts. Please read our note on “Decarbonising the Chinese economy”: learning by doing”.
China’s iron ore imports rose by 10%/mth, but fell 3%/yr in August (chart 6). Demand for iron ore showed signs of weakness as China’s steel output comes under pressure. Policymakers want to cut China’s crude steel output in H2 2021 to reduce carbon emissions.
Plans though to keep China’s crude steel output in 2021 at the same level as 2020 will be challenging. After rising ~8%/yr in the first seven months of 2021, China’s crude steel output will need to fall ~12%/yr from August to December to meet policy objectives.
Reports that steel mills in a number of provinces are being instructed to reduce steel output suggest that there will be a genuine effort to cut steel output in H2 2021. Policy remains a key risk to the decline in China’s crude steel output for the remainder of the year. Our primary concern is that the nation wide cut to steel output results in higher steel prices. That could see inflation concerns crop up again, like in mid May, potentially seeing policymakers relax steel output cuts.

Really - DYOR