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RPT-COLUMN-China's pollution control yields wrong question on coal cuts: Russell
August 7, 2014 / 12:01 PM / 3 years ago

RPT-COLUMN-China's pollution control yields wrong question on coal cuts: Russell

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(Repeats story that ran earlier today with no changes to text)

--Clyde Russell is a Reuters columnist. The views expressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, Aug 7 (Reuters) - Just how serious is China about cutting or limiting coal consumption?

That's something that global coal miners, traders and environmentalists would love to know, but the likelihood is that it is the wrong question.

Hardly a week goes by without an announcement by one of the many central or regional authorities about plans to curb the burning of coal, the fuel that meets about two-thirds of China's electricity needs and powers the world's biggest steel industry.

The latest was from the Beijing Municipal Environmental Protection Bureau, which was reported by state media as saying coal use will be banned in the six main districts of the capital by the end of 2020.

This is correctly viewed as the authorities' response to what is self-evident to anybody living in, or visiting, many Chinese cities: Pollution has reached intolerable levels.

The problem for the global coal industry is that the country on which it is counting for much of the growth in demand is now actively looking to curb use of the fuel.

Questions are asked as to whether this time the Chinese authorities are serious about limiting coal consumption, as past efforts have stumbled on the altar of economic growth.

Given the weight of social pressure on the ruling Communist Party to do something about pollution, it seems that the answer is most likely, yes, this time they are serious.

But for the international coal industry, concerned about the future of exports to China, the correct question is not by how much China will limit coal consumption, but how much of the fuel it will allow to be mined domestically.

After all, even if China does limit coal use to 4.1 billion tonnes next year, what is important to the global industry is how much of that needs to be imported, at what price.

China produced about 3.7 billion tonnes of coal in 2013, and is on track to match this in 2014, given that 1.85 billion tonnes were mined in the first six months of the year.

Coal imports have also been roughly steady, rising 0.9 percent to 159.87 million tonnes in the first half of 2014 from the same period a year ago. Imports were 267.1 million tonnes in 2013, up 14 percent from 2012.

China, similar to the rest of the world, is currently in a coal surplus, with domestic prices falling and imports only able to compete by matching lower prices and by being easier to ship to the industrial southeast of the country.

More than 70 percent of China's coal firms are loss-making, and the situation is likely to get worse, Wang Xianzheng, the chairman of the China Coal Industry Association, told an industry forum on July 24.

This is leading to the closure of many smaller and less efficient mines, a process being accelerated by authorities who are closing pits for safety reasons.

Mine openings and expansions, however, are likely outpacing closures, with more than 100 million additional tonnes approved last year, part of the 2011-15 five-year plan to increase annual capacity by 860 million tonnes.

China's Coal Choices

What is apparent is that China, if it chooses to, will be able to mine all its domestic coal needs. But it probably won't.

It's more likely that large, cost-efficient mines will be promoted, while smaller scale operations are forced to close, either through regulation or lack of profitability, given that cheap coal prices are likely to persist for several years.

What also appears to be an increasing trend is to concentrate new coal consumption in more remote areas in the northwest of the country, close to where it is mined.

This new consumption can take the form of industry, power plants or coal-to-gas plants.

At the same time, polluting power plants and industries closer to major city centres are being idled, while others are being encouraged to be more efficient.

What this means, particularly in the industrial zones of the southeast, is that there will still be a market for imported coal, especially for grades that are of higher calorific value.

The problem for coal miners in Australia, Indonesia, South Africa and the Americas is that this isn't a sure enough bet on which to base millions of dollars of investment to expand production.

Over the next two decades, Chinese coal consumption is expected to rise even as the fuel's share of power generation declines, with nuclear, gas and renewables increasing.

For global coal miners seeking to grab some of this rising consumption, the key is to watch trends in China's domestic output.

Signs that output is stagnating, or growing more slowly than use, will open the door to further imports, with the proviso that these will have to be at prices cheap enough not to encourage increased domestic mining. (Editing by Tom Hogue)

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