BANGKOK -- China, the world's biggest consumer of coal, is set to shake up the seaborne market for the commodity with a series of new taxes and policies, partly designed to help struggling domestic producers compete against cheap imports from Indonesia and Australia, the world's leading exporters.
Analysts said the new rules would affect both thermal coal, used for electricity generation and heating, and metallurgical coal, a more expensive product integral to steel making.
"China's coal policies are moving in a bid to boost profitability in the domestic industry and to tackle pollution concerns," said Daniel Morgan, an analyst at UBS, a Swiss investment bank. However, Morgan said the moves might not be wholly negative for seaborne coal markets, because of the interaction of policy changes.
The main Chinese initiatives are a directive to independent power producers to curb imports; minimum coal quality specifications; and a new tariff regime -- the first time tariffs have been imposed for seven years -- which will reduce the price advantage of imported coal.
Chinese prices for thermal coal have fallen from more than $120 per metric ton in 2011 to $63.80, according to the Platt's/Fenwei China coal index on Oct. 21. Prices for metallurgical coal have dropped even more sharply, from over $300 per metric ton in 2011 to $97.10 for Australian hard coking coal on Oct. 21, according to The Steel Index, published by Platt's.
Tim Murray, managing director at J Capital Research, a China focused research firm, said the price slide reflected a combination of expanding global supplies and falling demand in China's slowing economy. China's government said on Tuesday that gross domestic product expanded by 7.3% year-on-year in the third quarter of 2014, the lowest rate since the first quarter of 2009.
Morgan said China's coal imports were likely to have peaked at 269 million metric tons a year in 2013, compared with 180 million metric tons in 2011. Coal imports fell by 5% in the first eight months of 2014, compared with the same period last year, according to figures from Macquarie, an Australian investment bank.
Thermal coal imports were down 2%, while metallurgical coal imports fell 16%, as the steel sector slowed sharply and consumed existing stocks. The trend appeared to be accelerating, Macquarie said.
China implemented domestic coal production cuts of 10% in August, and raised tariffs on Oct. 15 from zero to 6% for thermal coal, and from zero to 3% for metallurgical coal, higher than expected.
The production and tariff measures follow environmental restrictions imposed in January, which require that coal used in the Pearl and Yangtze river deltas must have an ash content lower than 16%, and a sulfur content lower than 1%. The deltas are important population and industrial centers in southern China, where there are no coal mines. Most imported coal lands in the two areas.
The environmental rules for imports are more stringent than those for domestic coal, which must have an ash content lower than 40% and a sulfur content no higher than 3%. Coal with an ash content higher than 20% and sulfur levels above 2% cannot be transported more than 600km.
Winners and losers
The new rules for imports appear least damaging to Indonesia and smaller Southeast Asian suppliers such as Vietnam, which are protected by a trade agreement between China and the Association of Southeast Asian Nations, and countries exporting coal with lower levels of impurities, such as Columbia.
"We believe the impact on imported coal will generally be positive since it tends to have a lower ash and sulfur content than domestic supply. In fact, Indonesia stands to benefit from the ban due to the quality of its current exports to China," Wood Mackenzie, an Australian energy consultancy, said in a report in September.
Australian producers look likely to be among the biggest losers, since they will be affected by both the tariffs and the environmental measures. Wood Mackenzie said that about 80% of Australian exports to China would fail to satisfy the newly imposed pollution controls.
Australia's resource dependent economy is already feeling the impact of a 40% plunge in the price of iron ore, its biggest export earner, since the start of this year. China is the destination for about a quarter of Australia's coal exports.
However, Joe Hockey, Australia's Treasurer, said on Oct. 21 that he had reached an agreement with his Chinese counterpart, Finance Minister Lou Jiwei, that Australian coal would be excluded from the coal tariffs regime once negotiations on a trade agreement between the two countries are completed. Australia hopes to conclude the agreement before Chinese President Xi Jinping visits the country for a summit of the Group of 20 biggest economies in November.
Analysts said a number of factors might ameliorate the effects of tighter measures on countries such as Australia and South Africa, another of China's big suppliers. New license rules in Indonesia, the world's biggest coal exporter, may crimp supplies leaving the country, at least in the short term, easing pressure on prices. Southeast Asia's biggest economy is also in the midst of a domestic political debate about resource self-sufficiency, and its policy trajectory remains uncertain following the inauguration of newly elected President Joko Widodo on Oct. 20.
Producers also have the option of meeting China's new environmental standards by washing thermal coal, which lowers its ash content but incurs extra costs.
UBS said Mongolia, which has emerged as a major supplier of metallurgical coal to neighboring China in recent years, should benefit from higher demand for its keenly priced metallurgical coal.
Pollution concerns remain the biggest longer-term problem for coal producers selling into China, where the "airpocalypse," a term given to the rising incidence of extremely high pollution readings, has prompted concerns among the increasingly vocal populace.
Analysts say any significant uplift in prices for thermal coal is unlikely in the next few years, with only a modest rise likely for metallurgical coal as demand for imports picks up in India, Japan and Europe.
Nevertheless, China is likely to remain the largest market for imported coal. The International Energy Commission says that added demand from China will outpace the rest of the world combined between now and 2020.
Wood Mackenzie forecasts that coal will surpass oil as the world's major fuel source by 2020, because of its abundance and relatively low cost. "China's demand for coal will almost single-handedly propel the growth of coal as the dominant global fuel," said William Durbin, president of global markets at Wood Mackenzie.