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The AUDUSD caught a bit of a bid yesterday on rumors that China might lift its ban on coal imports from Australia. This could have an important impact on the Australian currency. But, it could also not end up becoming effective, since this rumor has gone around before. Given the situation, it’s good to know what the potential impact would be, so traders can be prepared for either eventuality.

The facts

China is, of course, Australia’s largest trading partner, and used to be the largest buyer of Australian coal. China has a high demand for coal, as well. Both for manufacturing steel as well as for producing electricity.

But, in order to understand the situation, it’s important to remember that not all coal is the same. Coal used for making steel – coking coal – is rarer and more expensive. Also, Australia has a lot of it. It can be used for producing electricity, but thermal coal can’t be used for making steel. Thermal coal is a lot more abundant around the world, and Australia also produces it. But so does China.

The worsening and improving situation

China unofficially banned the import of coal from Australia back in 2020, after Australia took a hard stance on covid. The Australian government under Morrison even demanded investigations into the origin of the virus, pointing the finger at Chinese authorities. Since then, China has imported hardly any thermal or coking coal. Before the ban went into effect, China imported over $9.0B in coal per year.

There is a new government in Canberra, and Albanese has made it a priority to repair relations with Beijing. At the end of last year, he held a telephone conversation with Xi, following a visit by Australia’s foreign minister to China in a bid to improve relations. It’s thought that China could start lifting some of the ban on coal as part of a thawing of relations between the two countries.

The other factors to keep in mind

This isn’t the first time the rumor has gone around. Back in July, there were press reports that China was looking to reverse the unofficial ban. Naturally, that didn’t happen in the months since. The difference this time around is that the rumor comes in the aftermath of high-level talks between the two countries.

The other factor is that China is facing energy challenges. The country is looking to make its energy matrix a lot more green, and phase out coal. Particularly considering that China produces brown coal, which can be used to generate electricity, but is much more polluting than the thermal coal sourced from Australia. Already last year, China was facing energy restrictions due to a combination of factors, such as environmental restrictions, a drought, and high costs of alternative fuels such as petroleum because of the war in Ukraine.

As China reopens from covid and demand for both energy and steel would be expected to ramp up in the coming months, it’s logical to think China would be looking to secure coal supplies. The increase in trade could mean more demand for Australian dollars, supporting the currency. After all, coal represented a little under 10% of the total ore exports of Australia to China.

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