Chinese Coal Ban: The Losers

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-Bans to take effect Jan 2015
-Will high quality coal prices rise?
-Intent to slow China's coal consumption
 

By Eva Brocklehurst

Thermal coal producers in Australia now have another headache to go with low prices and high costs. China has declared war on the more polluting coals. The recent guidelines from the country's reform commission have suggested banning import, sale and production of high ash and sulphur coals, banning transport of moderate ash and sulphur coals more than 600km and banning the use of lower ash and sulphur coals in built up coastal areas and the northern cities, where imports are most competitive. Coal market analysts have speculated about new policies in China for some time but these have now been outlined and will take effect on January 1, 2015.

Commonwealth Bank analysts have argued for some time that China would address its pollution problems via a brake on coal demand growth.These new policies are expected to have a negative impact on thermal coal imports and the seaborne trade. The analysts have a hard time trying to find the silver lining in thermal coal. Any non-compliant coals currently sold into China could be re-directed to other markets, if those markets have the capacity to deal with lower quality coal. Producers could also wash the higher ash coals in order to meet the new guidelines or blend coals to meet guidelines. Either way this involves higher costs in a sector that is already suffering from low prices, high costs and, in Australia, a strong currency.

The analysts are not convinced demand and prices for higher quality coals will rise as a consequence of these decisions. Ultimately, they suspect China is trying to slow or reduce coal consumption and the country's trend in coal-fired electricity generation has been on a downward slope for some years. The analysts note, generally, China has been vigorously investing in renewables and natural gas/LNG to provide an offset for thermal coal.

While the new regulations are just one more step toward reducing coal dependence, the analysts do not expect the 52% of thermal coal consumed in power generation in China is immediately under threat from efforts to reduce pollution. Rather, the 22% of thermal coal consumed directly in factory boilers, coal gas furnaces and households is being replaced with natural gas. Nevertheless, the analysts find it hard to envisage how thermal coal demand will grow when around one fifth of the consumption base is contracting. Moreover, cheap coal deposits in China's provinces are underwriting construction of new efficient power generation for provincial industry bases or power feed for long-distance transmission.

So how will Australia's seaborne coal producers be affected? The analysts calculate that around 45% of total Australian thermal coal exports do not comply with the strictest of the Chinese regulations. However, to put this in context, Australia exported 47.5mt of thermal coal to China – or just 24.4% of total exports – in FY14. The analysts sift through Australia's large number of thermal coal mines and find a considerable portion do not comply, either on ash or sulphur or both. However, most of these appear to be already on care and maintenance, or not exporting. Those mines that export and do not comply include BHP Billiton's ((BHP)) Mount Arthur, JFE Steel's Sonoma, Gujarat NRE's Wongawilli, Yancoal Australia's ((YAL)) Stratford and Peabody's Wilpinjong. Those that partly comply and are exporting are Yancoal Australia's Moorlarben and Sojitz' Minerva. 
 

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