COLUMN-China, India may seek better quality coal: Clyde Russell
--Clyde Russell is a Reuters market analyst. The views expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, May 22 (Reuters) - Asian giants China and India may be planning to improve the quality of coal they are burning, but it's unlikely any changes will have much effect on the level of imports for the foreseeable future.
China's National Energy Administration is considering a rule to ban imports of coal with a calorific value below 4,500 kcal/kg NAR (net as received), ash of less than 25 percent and sulphur below 1 percent.
The reason for this is that low-rank coal is more polluting, as you need to burn larger amounts to generate the same energy.
And in India, specialist monitors are being called in to try and improve the quality of domestic coal being delivered to power stations.
Last month, NTPC, India's largest utility, refused to pay for coal viewed as substandard, prompting Coal India , the world's largest coal mining company, to respond by suspending supplies and raising concerns of blackouts.
Poor quality domestic coal forces Indian utilities to import at higher prices, even though much of the fuel brought in is lower-quality Indonesian fuel.
On the surface, these measures in the world's top- and fourth-ranked importers may seem bearish for the seaborne coal market, but in reality the impact may be muted, even assuming they take effect.
The proposed Chinese regulations would seem to mainly target Indonesian coal, with Jakarta-based stock broker Mandiri Sekuritas estimating about a fifth of the nation's low-rank exports would have to be diverted to other markets.
However, Morgan Stanley pointed out in a research note on Tuesday that the Indonesian coal typically exported to China already exceeds the standard, so even if the measure is implemented, the impact will be minimal.
China's coal imports seem to be driven much more by price factors, especially in the current environment of slowing growth rates in electricity generation.
Power output did gain an annual 6.2 percent in April, picking up the pace from March, which posted the weakest growth in six months.
However, slower economic growth of around 7.5 percent in 2013 will limit power consumption, which only rose 4.3 percent in the first quarter.
In this light, it may be a surprise that China's coal imports are still growing strongly, with April's 23.49 million tonnes up nearly 19 percent on the year, and taking the year-to-date gains to 25 percent.
China's coal imports could hit 300 million to 350 million tonnes in 2013, exceeding 2012's record of 230 million tonnes, according to Phil Ren, president of the China Coal Importers Association.
Notwithstanding the strength in imports, this forecast seems too optimistic, as it would require imports to average about 26.5 million tonnes for the May to December period, up from 21.8 million for the first four months of 2013.
It would also require imported coal prices to stay attractive compared to domestic output, and this may not be the case.
Benchmark Australian prices at Newcastle Port rose 0.5 percent to $88.03 a tonne last week, while Chinese prices fell to 612 yuan ($99.83) a tonne from 613 yuan.
At these levels imported coal will struggle to be competitive, as the cost of freight, insurance and duties still has to added in, and this is around $18 a tonne currently.
For India, moves to improve coal quality could actually play into the hands of exporters.
It's doubtful whether Coal India can increase the average quality of the coal it produces by much, given the gradual decline in the grade at operating mines, and of reserves.
This means utilities may be forced to buy more higher-value coal from abroad for blending purposes.
This may not increase the overall volume of imports into India, which rose 29 percent to a record 135 million tonnes in 2012-13, and are set to grow further this year.
Rather, it is likely that some of the low-rank Indonesian coal bought by India will be replaced with better-quality supplies, either from the Southeast Asian nation or from other producers such as South Africa and Australia.
While the tentative moves to boost coal quality may not have much immediate market impact, their importance lies in whether they are the first of many steps.
Given global and domestic concerns about pollution and carbon emissions in both China and India, it seems likely that authorities will seek to get more out of the coal they use.
That can only mean a switch to higher quality fuel or improving technology to extract more, and cleaner, energy from low-rank coal. (Editing by Clarence Fernandez)