A surprise announcement from Beijing last weekend that it had banned coal imports from North Korea is causing a fracas in China's coal market, as traders scramble for supplies of the commodity that is used in steel-making and heating.
In 2016, China imported 22.5 million tons of coal from the hermit kingdom, representing 12.3 percent of its total imports, said BMI Research. The commodity is also a key export for the isolated nation in the Korean Peninsula.
Prices of steel and coking coal are rallying this week as mills will need 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.
Wang Zhao | AFP | Getty Images
his picture taken on December 14, 2012 from China's northeastern city of Dandong, looking across the border, shows a North Korean military officer (R) and a North Korea man (L) standing behind a pile of coal along the banks of the Yalu River in the northeast of the North Korean border town of Siniuju.
"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 were busy finding alternatives for coking coal, Reuters reported on Monday.
Mills will now have to buy domestic coal, which is more expensive, or import supplies from sources further afield like Australia.
While increased demand may help China's own coal production, it will also pressure Beijing to find other sources of thermal heating as the country strives to clean up air pollution, which has become a social and political hot potato.
"Chinese authorities appear to be strongly committed to their goal of closing outdated coal mines and boosting clean energy.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 .
Despite the short-term upswing in prices, there remains skepticism over the enforcement of the ban 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.