China has long been a major customer for Australian coal, with imports of metallurgical (met) coal averaging 42mn t/y between 2017–2020 until political tensions led China to unofficially halt shipments in late 2020.

However, the ending of the restrictions earlier this year is helping to boost Australia’s resource and energy export revenue, reports S&P Global Commodity Insights. The country’s Department of Industry, Science and Resources expects the figure to reach a record A$464bn ($315bn) in fiscal year 2022–2023, which ended in June. This number was driven by higher earnings from met coal and iron ore, plus a weak exchange rate for the Australian dollar versus the US dollar. The Australian government forecasts that annual exports of met coal will hit 172mn tonnes by fiscal 2027–2028.

However, a close look at the rapidly evolving Asian coal market indicates that the effects of the rapprochement with China could be more complicated, notes the market analyst.

‘China’s return to buying Australian metallurgical coal since January is not expected to open the floodgates for higher volumes in 2023, indicating a major rejig in met coal trade flow in Asia is not yet imminent,’ say Rohan Somwanshi, Head of Agriculture and Asia Metals News, and Claudia Seah, Associate Editor for Metallurgical Coal, of S&P Global Commodity Insights.

Imports of Australian met coal in China are expected to reach 8–10mn tonnes in 2023, they say – a fraction of the total in 2020, before the trade halt began.

Among the factors limiting the potential bonanza are unfavourable price spreads, flagging steel markets that have weakened Chinese demand for met coal, China’s push to develop domestic alternatives to imported coal and alternative suppliers who have made inroads into the Chinese market. The worldwide drive to produce ‘green steel’ by lowering carbon emissions from steel production and Australia’s goal of achieving net zero emissions by 2050 is also expected to pressure coal exports.

For now, much of the growth in coal exports is happening in south Asia instead of east Asia. India, which is the second-largest steel producer behind China, is now the largest customer for Australian coal. Australia exported just under 50mn tonnes to India over fiscal 2022–2023, according to S&P Global Commodity Insights data. India also signed a free trade agreement with Australia, which came into effect in December 2022, that eliminates import duties on met coal.

‘The geopolitical implications of this shift will be profound,’ says S&P Global. The GDP of India, Asia’s third-largest economy, is forecast to expand by about 7% in fiscal 2023–2024, according to economists surveyed by Reuters. ‘This is a rate of growth that China’s leaders can only envy. Additionally, closer economic and diplomatic ties between Australia and the Indian government led by Narendra Modi represent a nascent challenge to China’s status as the preeminent superpower in Asia.’

The revival of the Chinese market and increasing sales to India have put Australian coal on an upward swing. Investment in coal exploration surged 30% year over year to A$70mn ($47mn) in 4Q2022, according to the Australian government. Production of thermal coal, burned in power plants to generate electricity, is expected to increase over the next two years, according to the government’s June 2023 Resources and energy quarterly report, but the price per tonne will still be relatively high by historical standards, reducing the competitiveness of thermal coal over other energy sources in the longer term, notes S&P Global.

Attractive market for grid-scale energy storage
Meanwhile, Australia is leading the global market for battery energy storage systems (BESS), with the total pipeline of projects now exceeding 40 GW, according to the latest analysis from Wood Mackenzie. The market analyst also predicts that capacity buildout is set to accelerate, with battery system pricing expected to decrease by 18% over the next decade.

‘The recent surge in renewable energy and competitive market design has made Australia one of the most attractive markets for grid-scale energy storage globally. Helped by the presence of competitive wholesale and frequency control markets offering diverse revenue streams for battery storage, and significant funding from the Australian government providing revenue certainty to storage projects. Because of this, we expect a 28% increase in the country’s battery storage capacity from now until 2032,’ says Kashish Shah, Senior Research Analyst at Wood Mackenzie.

Currently, the levelised cost of energy (LCOE) of standalone grid-scale energy storage is still expensive compared to other dispatchable generators but will undercut gas-fired power generation in 2032 according to the Wood Mackenzie findings.

Going forward, it expects renewables plus storage to undercut coal and gas in 2028, which is when the capacity buildout of battery storage will accelerate in the Australian market.

Offshore wind development 
In other energy news from Australia, the government has declared an area in the Pacific Ocean off the Hunter region of New South Wales as ‘suitable for future offshore wind development’. Covering some 1,854 km², the declared area is reported to have the potential to generate up to 5 GW of renewable wind energy, enough to power an estimated 4.2 million homes and help Australia reach its net zero by 2050 goal.