By Kevin Morrison

October 2, 2020 - Chinese demand for metallurgical coal may weaken in the medium term as the world's largest steel producer will increasingly use scrap steel as a feedstock for future steel production, but any fall in Chinese demand may be offset by an increase in metallurgical coal demand from India through an expansion of steel production there, Australia's Queensland state government said.

China has vied with India over the past eight years as the largest buyer of Australian metallurgical coal exports, most of which are shipped from Queensland ports, so any downturn in demand from China will impact Queensland, which derives a greater share of its revenue from royalty payments from coking coal producers than New South Wales, the only other coal-exporting state in Australia.

"Looking beyond 2020, the potential for China to increasingly recycle steel scrap may lower the demand for metallurgical coal imports to China in the medium term," the Queensland treasury said in a study of long-term global coal demand. The Queensland treasury is the state's central financing authority.

Technological advancements also have seen the development of alternative steelmaking processes, which do not require metallurgical coal, while increasing the scarcity of high-quality coking coal means alternative approaches are likely to become more prominent in the long term, the Queensland treasury said.

But as India's steelmaking capacity expands, the country has increasingly become a growth market for Queensland's metallurgical coal exports, it said. "The scale of India's expansion, if it eventuates, is expected to be large enough to offset, or largely offset, any potential reduction in demand for metallurgical coal from China," the Queensland treasury said.

Hard coking coal, semi-soft coking coal and pulverised coal injection account for around 80pc of Queensland's coal exports, with thermal coal accounting for the remaining 20pc.

The Queensland treasury report highlighted more concerns over the outlook for thermal coal. The substantial overhead costs required to develop large-scale greenfield thermal coal projects under the weakening thermal coal trade outlook have impacted the viability of projects, the report said.

Analysis by both the Queensland treasury and International Energy Agency (IEA) highlights that long-term global demand for thermal coal remains uncertain, the treasury report said.

If global demand trends were to play out closer to those described under alternative scenarios such as the IEA's sustainable development scenario, which is fully aligned with the Paris agreement, or those in the Intergovernmental Panel on Climate Change's special report on Global Warming of 1.5?C, there could be implications for Queensland's coal industry, particularly in relation to the long-term outlook for thermal coal, the treasury report said.

Coal shipments from Queensland's ports remained subdued in August after reaching a 17-month low in July, as demand stayed weak and ports used the slow period to undertake maintenance.