Chinese demand, especially for metallurgical coal, has been a shining light for Australian coal producers and, with the exception of Xstrata’s recent cuts to Tahmoor and Ulan, has largely halted the wave of job and production cuts that rocked the industry in the first three months of the year.

The unexpected demand from China has been attributed in part to its 4 trillion yuan stimulus package but more so to the nation’s crackdown on coal safety, which has led to mine shutdowns, and a price arbitrage scenario where importing has worked out cheaper than sourcing coal domestically.

So far China is estimated to have imported a net 36 million tonnes of coal this year, compared to a mere 3.9Mt in the first half of 2008.

Just last week Dalrymple Bay Coal Terminal general manager of operations Greg Smith told ILN about 35-40% of the current deliveries going through the port were destined for China, but he stressed the port had no insight into how sustainable that demand would be into the future.

Macarthur Coal has reported it will monitor ongoing demand to assess whether its improved outlook is sustainable, despite holding an upbeat view of metallurgical coal demand for the next few months, partly based on shipping requests.

While Felix Resources says both China and India have emerged as new markets for its coking coal, BHP Billiton has said it is well positioned in a modest demand environment, without referring to any specific commodities.

However, as a major exporter of metallurgical coal and iron ore to the east, BHP hinted that stockpiling of these bulk commodities might be coming to an end in China while picking up elsewhere.

“In the short term, we believe underlying demand trends are still being masked by destock and stocking activities across the value chain,” BHP said in its quarterly.

“China inventory build is essentially complete, while we are now seeing evidence that restocking has commenced in North America, Europe and Japan.

“However, commodity prices will be influenced by supply responses due to latent capacity currently existing in the industry.”

Evidence of restocking outside China can be seen from major steelmaker ArcelorMittal which, by the end of last month, had flagged further increases to steel production.

In the company’s annual report in April, Arcelor chairman and chief executive Lakshmi N Mittal thought the systemic failure in the banking system would cause disruption to industries worldwide through to 2010-11.

But in the recent half-yearly report he was more positive.

“In recent weeks we have started to see some initial signs of recovery, as a result of which we are now planning to restart production at some facilities,” he said.

“Provided there are no further unexpected economic deteriorations, we should see continued gradual improvement throughout the second half of the year, with full recovery remaining slow and progressive.”

Xstrata chief executive Mick Davis has maintained a positive outlook for commodities demand but expects a world recovery will require either the US to overcome its recession or China to create much stronger domestic demand.

“As stock markets rebound and achieve significant gains, it would be tempting to believe that the world is returning to pre-financial crisis conditions,” he said.

“However, until US consumers emerge from the current deep recession to resume expenditure and consumption in any meaningful way or domestic consumption in China of similar power emerges, I fear that this belief is somewhat premature.”

But the role of China in this year’s recovery since March might not have been emphasised by coal producers as much as some analysts.

At the end of June, Australian Bureau of Agricultural and Resource Economics chief commodity analyst Dr Jammie Penm revealed how important he viewed Chinese domestic demand to be to the global economy in the March quarter alone.

“One can attribute the increase to the significant stimulus package implemented by the Chinese government, especially in terms of infrastructure; but still, if you look at the world economy as a whole, it seems to me that the bright spot really is the domestic demand in China.

“Hypothetically, if that strong domestic demand is not there, then I think the alternative scenario would be very pessimistic.”

Outside China, glimmers of increasing coal demand have come mainly from India and for thermal coal from South Korea, which has brought new coal-fired power units online this year.

Patersons Securities coal analyst Andrew Harrington told ILN he had been cautioning some of his institutional clients and felt a lot of the share prices in the coal sector were looking a bit stretched.

“Investors are starting to factor in much higher prices than realistic for the next year or so.”

He said he was worried that coal trade to China could change very quickly as the country could bring on new mines and close up the arbitrage window for Australian coal producers.

“The imports and exports of coal from China are a minute fraction of the total production and consumption,” he said.

Harrington said China produced and consumed in the order of 2.5-3 billion tonnes of coal a year, and exported and imported in the tens of millions of tonnes.

“So any small percentage movement in production or consumption has a relatively big impact on their export-import picture.”