China to cut coal consumption

In what will be another blow for Australian coal miners, China will institute a reduction in thermal coal consumption within the next five years to cut pollution levels.

The announcement comes on the back of an aborted coal price rally, which saw coal prices fall from a surge of $80 per tonne in February rapidly back down to $68 per tonne.

The price surge was related to a forecast Chinese demand for cleaner Australian coal in response to pressures of air pollution, export cuts from the US and output cuts from Glencore, as well as a 30 per cent rise in the price of oil.

Now these forecasts have been crushed, with the National People’s Congress (NPC) outlining plans to reduce thermal coal consumption by 160 million tonnes over the next five years, according to The Australian.

China’s ongoing pollution and smog issues were the main focus of the NPC, with Chinese president Xi Jinping stating that the government will be increasing focus on the nation’s environmental standards and regulations.

“We are going to punish, with an iron hand, any violators who destroy ecology or the environment,” Xi stated.

However the Minerals Council of Australia believes that this isn't an indicator of a total dumping of coal.

"China’s evolving environmental policies are being confused with a policy shift away from coal," it has previously stated.

"Coal currently accounts for 80 per cent of China’s electricity output and all leading energy forecasting agencies analysts agree that ongoing industrialisation and urbanisation will drive robust coal demand for decades to come."

The International Energy Agency expects that coal will continue to dominate China’s energy mix to 2035, and that “China continues to import substantial amounts of coal, remaining a strong force in global coal markets”.

Yet this isn’t the first time China has looked to cut coal imports.

Last year the Chinese Government announced a tightening of the quality of its coal imports.

China’s National Development and Reform Commission issued new proposed guidelines dealing with import restrictions at different coal quality threshold levels.

This move was first telegraphed in 2013, after China’s National Energy Administration drafted regulations to ban the import and domestic delivery of poor quality thermal coal to help curb its rampant pollution levels.

Under the initial drafts the regulations would ban coal with a net calorific value of 4540 kilocalories per kilogram or less, which would favour Australian coal at the expense of our main coal competitor Indonesia.

The government looked to limit the use of imported coal with more than 40 per cent ash and three per cent sulphur in from the start of next year.

Sources close to the matter also told Australian Mining that the quality restrictions were to be brought in for domestic suppliers as well.

On top of the quality thresholds there is also mention of slashing coal imports themselves by around 50 million tonnes over the coming year.

It is unknown how these new governmental decrees will affect the Free Trade Agreement, signed late last year, which eliminates tariffs on all Australian resources and energy products.

However in spite of these forecast cuts, recent export data shows Chinese demand for Australian coal still exists.

Export data released by Coal Services reveals that in 2013-14 NSW coal exports rose by nearly 8 per cent from 155 million tonnes to 167 million tonnes.

The results show Asia is still hungry for Australian coal, with demand from Taiwan rising by 14 per cent, demand in Korea up by 8.7 per cent, and demand in Japan higher by 1.7 per cent.

China’s demand for NSW coal has increased by 22 per cent over the last financial year.

While exports have been higher, prices over the last 12 months have made for tough times in the NSW coal sector.

The Bureau of Resources and Energy Economics (BREE) predicts more pain for 2015, with thermal coal expected to remain weak, eventually settling at US$77 for the year.

Coking coal prices are also set to suffer, forecast to decline by 2.6 per cent to an average US$123 a tonne in 2015.

BREE said from 2016 the market balance is expected to tighten as more mines close and availability tightens, leading to a slight increase in prices.

 

Image: Reuters/Jason Lee