--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Jan 17 Coal miners in
Australia and Indonesia could be forgiven for feeling depressed,
given the plethora of news coming out from top buyer China on
how it intends to cut demand for the dirty fuel.
In the past few days China's National Energy Administration
has set a target of lowering coal's share of energy use to below
65 percent in 2014 from last year's 65.7 percent, three years
ahead of initial plans.
Beijing's mayor has urged an "all-out effort" to tackle air
pollution, pledging to cut coal use by 2.5 million tonnes a year
in his polluted city.
In neighbouring Hebei province, the country's biggest
steel-making region, authorities have said they will block new
projects, punish officials in areas of high pollution, and cut
steel output and coal use by 15 million tonnes each this year.
This all sounds bearish for coal, and the gloom of miners
that export to China could be deepened by signs that domestic
supply in the biggest producer and user of the fuel is rising.
Industry figures suggest China's coal output rose about a
percent last year to 3.7 billion tonnes, up from 3.66 billion
tonnes in 2012, but its five-year plan for 2010-2015 calls for
adding 800 million tonnes.
About 100 million tonnes of that additional capacity is
expected to come onstream this year.
China also plans to raise annual coal rail capacity nearly a
third to 3 billion tonnes by 2020 and build 11 large-scale
storage and distribution bases to aid logistics.
Lack of transport from coal-mining regions in the north and
west of China to major consumers in the industrial south and
east has previously served to turn the nation into the world's
biggest coal importer.
For Asia-Pacific coal miners focused on growing their
business by meeting rising Chinese energy use, it seems like a
triple-whammy of lower demand growth, higher domestic supplies
and improved infrastructure.
But there are always a few "buts" to consider.
EXPENSIVE RENEWABLES, ECONOMIC GROWTH
The first is whether China can actually achieve the planned
reduction in coal's share of energy generation.
While some hydropower capacity can still be accessed, this
source of power generation is nearly tapped out. That means
other renewables such as wind and solar will have to join with
nuclear and natural gas to displace coal power.
While this capacity can be built, it remains vastly more
expensive, and generators, provincial authorities and industry
have little incentive to switch to costlier power sources.
Even if China is successful in cutting coal's share to below
65 percent, absolute volumes used will continue to climb.
Power consumption rose 7.5 percent in 2013 to 5.32 trillion
kilowatt hours, according to official figures, putting its
growth at the same pace as economic expansion.
Even with increasing energy efficiency factored in, and
assuming gross domestic product growth remains around 7.5
percent, it wouldn't be unreasonable to assume power consumption
gaining about 7 percent in 2014.
Then, even if China achieves a 0.7 percentage point
reduction in coal's share, the amount of additional coal needed
would still be in the region of 200 million tonnes.
COAL OUTPUT TO INCREASE BY 100 MILLION TONNES
China's coal output is expected to be around 3.8 billion
tonnes in 2014, a gain of 2.7 percent, or about 100 million
tonnes, from 2013, according to figures from the China National
This suggests as much as 100 million additional tonnes may
be sourced from imports, assuming no change in inventory levels.
It's unlikely that import growth will be that strong,
however, given that many cargoes are destined for the Pearl
River and Yangtze River deltas, both areas where
pollution-reduction efforts are likely to be among the
Chinese coal imports totalled 239.2 million tonnes in the
first 11 months of 2013, a gain of 16.6 percent on the same
period in 2012.
Given the foregoing, an increase of a similar magnitude
seems entirely plausible in 2014, provided international prices
remain competitive with China's domestic production.
Currently this is the case, with weekly benchmark spot
prices at Australia's Newcastle port at $83.23 a
tonne as of Jan. 10, only slightly above the four-year low of
$76.70 hit in September last year.
Australian producers may also find themselves gaining a
slight edge over their Indonesian rivals, after the moves by
China to raise the quality of coal being burned.
Indonesia, the largest exporter of thermal coal for use in
power plants, produces lower calorific coal than Australia, the
biggest shipper of coking coal and thermal coal combined.
Coal miners should be wary on a longer-term basis, though,
as trends sometimes gain a momentum all of their own.
China is clearly heading down the path of trying to use less
coal, while improving its domestic output and infrastructure.
While this doesn't mean an end to imports, it does mean
inbound coal will have to be cheaper than domestic supplies, and
this points to structurally lower prices for miners.