SHANGHAI Nov 15 A choking smog across much of
northern China threatens not just the health of local residents,
but also of major coal projects globally that are still on the
Beijing's plans to tackle pollution largely target
coal-fired power, which will hit already slowing demand in the
world's top importer of the fuel.
With China's coal demand the primary driver for a slew of
mine investments over the past decade, this trend could derail a
list of capital intensive coal projects from Australia to
Indonesia and Mozambique.
Even without the environmental drive, new railways from
mines to ports, falling investment in coal-fired generation and
slowing power demand growth could see China's miners export some
of their surplus output at competitive prices, hitting regional
miners and the viability of new projects.
This is a major shift for a country that built an average of
two coal-fired power plants every week in the last decade, went
from net exporter in 2009 to the world's top importer just two
years later, and burns nearly as much coal as the rest of the
"China is kicking its coal addiction," said Chen Yafei,
vice-director at the China Coal Research Institute. "With slower
economic growth and a big push towards gas and renewables, the
golden decade for coal is over."
China's coal imports grew by 17 percent in the first 10
months of the year, down by nearly half from the 30 percent in
2012. With weak demand and high domestic output, inventories
have been stuck at record high levels of 300 million tonnes most
of this year.
China's massive jump in coal use - to 3.8 billion tonnes in
2012 from 2.5 billion tonnes in 2006 - drove prices of benchmark
Asian thermal coal to average $121 a tonne in 2011,
from less than $50 five years earlier.
But a raft of mine expansions during the boom years and weak
demand caused by the global economic slowdown pushed prices to a
3-year low near $80 a tonne in October 2012, and they have
stayed below $100 since.
Goldman Sachs expects seaborne coal trade to grow at just 1
percent until 2017, compared with 7 percent from 2007-12.
PROJECTS IN PERIL
Miners bullish on demand are planning projects in areas that
need significant infrastructure investment, such as the Galilee
basin in Australia and the Sumatra region in Indonesia, but need
high prices for the projects to make sense.
India's GVK Power & Infrastructure and Adani
Enterprises are amongst those spending billions of
dollars on new mines in the remote Galilee Basin.
State coal miner PT Bukit Asam's $2 billion coal
railway project in Indonesia's South Sumatra is in doubt after
India's Adani Group pulled out. Sumatra holds half of the
country's resources but accounts for just 4 percent of output
due to infrastructure constraints.
In Mozambique massive spending is needed on railways and
ports to allow companies like Rio Tinto Ltd and
Vale SA to make the most of potential reserves.
"The prospect of weaker demand growth and prices at near
marginal production costs suggest that most thermal coal growth
projects will struggle to earn a positive return for their
owners," Goldman Sachs said in a report.
In Australia, about 40 out of 71 thermal coal mines surveyed
by consultancy Wood Mackenzie had a cash cost of above $87 a
tonne, while many of the proposed projects require a coal price
of $120 a tonne to be viable, according to a report by
Australia's Centre of Policy Development.
They could soon find themselves competing with Chinese coal,
which is set to become more competitive as production costs
Beijing is mulling proposals to scrap a 10-percent coal
export tariff, a move which could easily see shipments jump
four-fold to the annual quota of 38 million tonnes as Chinese
coal becomes more competitive.
Plans by the railway ministry to double the volume of coal
carried on dedicated railroads to 2.4 billion tonnes by 2015
will cut production costs, as will an ongoing mine
Railway tariffs cost about 0.15 yuan per tonne for each
kilometre, less than half the cost of around 0.35 yuan by truck,
according to data from the China Coal Transport and Distribution
More coal moving by rail will cut China's average production
cost for thermal coal in the next 2-3 years by $10-$15 a tonne
to $80-90, including value-added tax, according to brokerage
KICKING THE COAL ADDICTION
Power demand growth has fallen even further than economic
growth as China has cut its energy use to about 0.7 times GDP
growth, according to Reuters calculations based on data from the
statistics bureau. That compares with an average multiplier of
1.1 times from 2005-2012
A surge in hydropower, nuclear and gas power has cut coal's
share in power generation to 73 percent this year, from 78
percent in 2007, and this is set to move even lower.
Hydropower capacity is targeted to grow about 6 percent a
year to reach 290 gigawatts by 2015, nuclear capacity to
quadruple to 58 gigawatts by 2020 and gas-fired capacity to
double to 56 gigawatts by 2015.
That compares with an expected 4 percent annual growth in
thermal power capacity, half that seen between 2005 and 2011,
said Liu Xiangdong, director of planning statistics of the China
"The pollution question in China is huge so they will shift
more towards gas for transportation and in power, no matter how
high the price is," Ian Taylor, chief executive of Swiss trading
house Vitol, told Reuters.
"The move will come largely at the cost of lower coal use. I
personally worry that coal is going to be a problem as demand
will come off much faster than we think."