Weak Coal Prices

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http://www.businesstimes.com.sg/premium/...e-20140901

PUBLISHED SEPTEMBER 01, 2014
Indonesian coal sector set to consolidate
Prices have been soft, and it may take a while for a stable turnaround to come
BYANDREA SOH
sandrea@sph.com.sg @AndreaSohBT

The Indonesian coal sector is primed for a shake-up. Dark clouds are hovering over it, presenting rich pickings for cash-rich coal producers and investors on the hunt for a bargain - PHOTO: AFP
application/pdf iCONCoaling down
[SINGAPORE] The Indonesian coal sector is primed for a shake-up. Dark clouds are hovering over it, presenting rich pickings for cash-rich coal producers and investors on the hunt for a bargain.
However, this will take some time to bear out as the industry waits to ride out the bottom of the cycle. Observers add that the industry is also awaiting more regulatory certainty from the new government of Joko Widodo, or Jokowi, as he is popularly known.
Demand for thermal coal - of which Indonesia is the world's largest exporter, controlling 40 per cent of the total seaborne market - is seen to be in structural decline, as costs of alternative energy sources such as shale gas fall and as environmental policies become stricter in countries like China and the US.
Add to this scenario the ballooning supply of coal: US coal exports are growing, Indonesia is stepping up production and Colombia is boosting output to a record this year.
Scott Dendy, the Asia-Pacific head of McCloskey Coal at IHS Energy, said: "Prices have been declining for over two years now, and there is little further cost-cutting that can be done. To this end, we believe prices are near the bottom, but there'll probably be a few false dawns before stable recovery emerges."
In Indonesia, the consolidation will weed out the less efficient or over-leveraged operators, he said.
Alberto Migliucci, chief executive of Petra Commodities, a boutique investment advisory firm in mining and oil and gas, agreed, and predicted a wave of mergers and acquisitions (M&A), with the cash coming not just from corporate cash hoards but also from personal wealth.
Singapore companies are among those rolling up their sleeves for the action.
In July, private-equity player Tembusu Partners invested US$7.5 million in Param Mitra Coal Resources Pte Ltd. The companyholds two operating coal mines in Kalimantan with a resource base of about 500 million tonnes.
Mr Migliucci said: "Private-equity players are experts at sourcing assets when they're relatively cheap . . . A lot of the Asian private-equity guys - whether out of Hong Kong or Singapore - are looking.
"Financial investors are selective in buying coal assets as the down-cycle could last longer than expected . . . so there may be a bit more time to wait before we see full steam on the M&A front."
First, there needs to be certainty.
Erlend Engelstad, a senior analyst at brokerage firm Marex Spectron, noted that president-elect Jokowi has pledged to improve transparency in his government and to ease regulatory pressure for exporters.
Coal represents about 14 per cent of Indonesia's total exports. The commodity, which accounts for 40 per cent of all power generated globally, is mostly produced and consumed domestically; the seaborne export market makes up only 14 per cent of global demand.
With China taking stricter environmental measures - it will ban all coal use in Beijing by 2020 to rein in the city's bad-air days - and supply continuing to expand, short interest in coal players has built up.
Financial data provider Markit said the average short interest in US coal firms such as Walter Energy Inc and Arch Coal has surged in the past 11/2 years, and stands at 3.85 per cent of outstanding shares.
Markit analyst Simon Colvin said: "In the ever- shifting debate on future sources of energy, few sources of energy have fewer friends than coal. The once-ubiquitous commodity has lost popularity in a world increasingly focused on reducing the environmental cost of energy production."
But try as they might to reduce carbon intensity, policy-makers will find it hard to change their countries' energy profiles significantly without compromising on their economic competitiveness, said Standard & Poor's in a July 21 report. The ratings agency thus expects demand for coal, especially in India and China, to continue to grow in absolute terms in the next five years, although at a lower- than-historical rate.
In the short term, the situation looks dismal. The supply glut that has driven coal prices to their lowest since 2009 will more than double from 6.8 million tonnes this year to 14.9 million tonnes next year, said Morgan Stanley in a July 8 report.
Miners such as Vale and the Peabody Energy Group are starting to cut supply.
But Peabody's chief executive Gregory Boyce expressed optimism during a conference call in July, saying the firm is starting to see signs of rebalancing, although seaborne coal markets remain over-supplied.
He said: "More than 2,000 smaller mines (in China) are expected to close by 2015, as the growing amount of Chinese coal production is uneconomic."
Out of the rubble left behind by the pressure of low coal prices will arise new - and perhaps bigger - players. Petra's Mr Migliucci said: "Within six to 18 months, we'll see much more consolidation, and the coal sector will be a different place from now."

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Iron ore, coal face chronic price pain, former BHP exec warns
THE AUSTRALIAN SEPTEMBER 10, 2014 12:00AM

Barry FitzGerald

Resources Editor
Melbourne
Sarah-Jane Tasker

Reporter
Sydney

FORMER senior BHP Billiton executive Alberto Calderon has warned Australia faces a permanent fall in prices for its major ­exports of iron ore and coal as growth in the Chinese economy becomes increasingly driven by private consumption.

And the Yale-trained professor of economics — one of the contenders for the top job at BHP that went to Andrew Mackenzie — said it would be wrong to pin economic hopes on the burgeoning LNG ­export industry because the gas was expensive, and there was a new supply challenge coming from Russia and the US.

Speaking last night at a Bloomberg forum in Melbourne, Mr ­Calderon painted a bleak outlook for Australia’s biggest ­export earners of iron ore, metallurgical coal and thermal coal, with the first two steelmaking raw materials. “On one side, we will see almost no growth in Chinese demand for iron ore, even if there is some growth in steel,’’ Mr ­Calderon said.

“On the other side, we are seeing a wall of iron ore supply being dropped in to the market by the large mining companies. It is not difficult to see why iron ore prices have collapsed and why they will go even lower.’’ Mr Calderon was previously part of BHP’s inner circle. Before leaving last year he was in charge of the ­aluminium and nickel division, as well as corporate development. He also continued on in a special advisory role to Mr Mackenzie for some time. His comments come as iron ore has collapsed from last year’s ­average of $US135 a tonne to a five-year low of less than $US84 a tonne.

Earlier in Sydney, one of Rio Tinto’s top executives warned of a continued challenging environment for thermal coal — the nation’s third biggest export — which is likely to expose a new source of pain for the resources sector.

Australia’s top three exports, valued at more than $100 billion annually, are all under severe price pressure. At its peak, thermal coal was priced at above $US130 a tonne, but it has fallen to around $US66 a tonne for coal shipped through Newcastle. For coking coal, also used in steelmaking, the price has fallen from more than $US300 a tonne to $US110.

Australia’s miners of the bulk commodities have been slashing costs to protect their margins but the price of thermal coal has hit a pricing point where it is expected that around 80 per cent of production is under water. “Coal producers here and around the world have taken a hatchet to their costs to survive and they’ll have to continue to do that over the foreseeable future,” Rio’s global energy boss, Harry Kenyon-Slaney said.

Mr Calderon said that with some certainty it could be that iron ore prices will revert to marginal costs, even overshooting in to the low $US70s for “some years’’.

Many iron ore producers would experience the same sort of pain that had for years characterised the aluminium and nickel industries, both of which China had worked at creating oversupply.

Mr Calderon noted that while 90 per cent of China’s energy growth used to be coal-based, it was now 80 per cent-based on ­nuclear, gas and renewables. “This is very good news for the ­environment and for climate change, not very good (news) for thermal coal,’’ he said.

Iron ore still overshadows metallurgical coal and steaming coal exports, coming in at about $US70 bn ($75bn) annually.

Mr Calderon said oversupply was the key factor in the price collapse. He stressed he was not talking about a contraction of the Chinese economy, rather a change in the mix of commodities required as China moves from its industrialisation phase to a consumer-driven economy. “The composition of growth will change significantly. Investment will not be the major driver of growth, it will be private consumption.’’ As China moves up the GDP per capita curve, there will be more demand for “middle income’’ commodities like copper, meat and corn at the expense of the “lower income’’ commodities of iron ore and coal.

“The challenge for Australia is how to move to the middle income commodities … Now is the time to dismantle the roadblocks to (again) allow productivity to increase and private investment to grow.’’

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http://www.ft.com/cms/s/0/34bcbe66-3821-...abdc0.html

September 9, 2014 3:11 pm
Concern grows as power crisis looms for India
By James Crabtree in Mumbai
©Reuters
On the campaign trail earlier this year, Narendra Modi often promised to bring power to the 400m Indians who lack basic access to electricity. But having won a thumping election victory, India’s prime minister is discovering that finding enough coal to keep the country’s existing lights on is hard enough.
Concerns that a power crisis may soon hit Asia’s third-largest economy have spiked in recent weeks, following a Supreme Court ruling that threatened to cancel more than 200 coal-mining licences belonging to private sector companies, potentially prompting renewed fuel shortages.
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• Indian stocks rally to fresh highs
• India declares coal licences illegal
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Coal remains India’s most important energy source, supplying more than half of all power stations. It is also increasingly scarce: stocks are at their lowest level since 2008, with plants responsible for around a third of national capacity holding supplies of just one week or less.
Alarm over these dwindling fuel piles this weekend forced Piyush Goyal, power minister, to deny that the country faced a repeat of the disastrous rolling blackouts that left some 600m people without electricity back in 2012, badly denting India’s global image. Seasonal factors had upped coal use, including weak monsoon rains which cut hydropower supplies, Mr Goyal explained, before pledging that stocks would soon be replenished.
Yet despite these reassurances, government data show blackouts increasing in many regions, including an unusual recent day-long power cut in the financial capital of Mumbai, raising fears that power difficulties may now begin to damage India’s tentative economic recovery.
The prospect of fuel shortages has focused particular attention on India’s inadequate domestic coal supplies.“It looks like we are heading into more trouble,” says Murtuza Arsiwalla, a senior analyst at Kotak Securities in Mumbai. “The power and coal system is in a bit of a mess.”
August’s Supreme Court ruling provided the initial impetus for these concerns, providing the latest twist in the so-called “coal scam” scandal over mineral rights allocation. On Tuesday, the court held a further inconclusive hearing on the issue, as it ponders whether to cancel the illegal licences outright.

Whatever its decision, attempts to fend off a renewed power crisis now depend on solving a deeper conundrum, namely the inability of India’s heavily regulated mining sector to dig up enough coal in the first place, despite abundant reserves.
Coal India, which churned out about 80 per cent of domestic supplies last year, lies at the heart of this problem. Even with a virtual monopoly on commercial production, the state-backed miner has consistently failed to meet higher output targets. The result is a fast-growing gap between demand and supply, which is set to leap from 259m tonnes this year up to about 370m tonnes in March 2017, according to investment bank Credit Suisse.

Unable to find reliable domestic coal, many businesses are forced to seek expensive coal imports, including those with plants in coal producing regions, according to Tom Albanese, chief executive of Vedanta Resources, a London-listed industrial group.
“We have an aluminium facility right in the middle of one of the biggest coal fields in India, and yet we can’t get local supplies,” he says. “We are forced to import, at huge cost, mostly from South Africa ... Its obviously a crazy situation.”
Imports come with other risks too. A number of power producers built large coastal plants over recent years, only to find plans to supply them with Indonesian coal hit by legal troubles. Those who buy foreign supplies are also rarely allowed to pass the extra costs on to customers, leaving many plants economically unviable.

Boosting domestic supplies will be far from easy, however. Indian coal tends to sit in inaccessible eastern regions, many of which are plagued by a long-running leftwing insurgency. Even if production could be increased, an overstretched rail network would struggle to transport millions of tonnes of extra fuel to distant industrial customers.
Despite being controlled by the state, Coal India has often been hampered by government environmental restrictions, stalling attempts to expand existing mines. Mr Modi’s government has also baulked at more radical possible solutions, such as privatising the state-owned company, or permitting private sector commercial mining.
“In the short term, there isn’t much of an option but a sizeable increase in imports,” says Kameswara Rao, a power specialist at consultants PwC. “But with supplies in such difficulty, the spotlight is now firmly on Coal India ... They are on the burning platform, so we have to hope this focuses their attention, and their supplies now improve.”

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Miners cheered by bullish outlook for coking coal prices
THE AUSTRALIAN SEPTEMBER 12, 2014 12:00AM

Barry FitzGerald

Resources Editor
Melbourne
COKING coal is emerging as a bright spot for miners still reeling from price crunches in iron ore and thermal coal.

Like iron ore and thermal coal, prices for coking coal — Australia’s second-biggest mineral export earner — have been hard hit this year, falling by 24 per to $US113.50 a tonne on a spot basis.

But the call has gone out that prices have bottomed and are set to bounce back to between $US130 and $US150 a tonne in the near term, and $US170 a tonne in the longer term

A $US20 a tonne price improvement would deliver the local industry a much-needed $US3.5 billion annual revenue boost, and a $US40 a tonne price improvement an even more ­welcome $US7bn lift.

Demand and prices for coking coal are linked to global steel production levels. Unlike iron ore, coking coal is not suffering from the huge oversupply that has caused iron ore prices to plunge 38 per cent to $US83.20 a tonne in the past six months. The global industry has also been more willing than the iron ore sector to close unprofitable production, mainly in the US and Australia, the leading seaborne exporter.

The commodities desk at Citi has been one of the first to call a bottom in coking coal prices, tipping a rebound in coming months, but with its long-term price expectation trimmed by $US10 to $US170 a tonne.

Its short-term bullishness — $US143 a tonne in 2015 and $US152 a tonne in 2016 — is based on a pick-up in Chinese steel ­demand, announcements of the closure of 14 million tonnes of annual production since April, and a slowdown in new supply growth

ASX-listed Tigers Realm Coal, which is planning a low-cost ­coking coal development in Russia’s east, outlined similar factors for the more buoyant outlook.

“We continue to believe that the coking coal price has bottomed and is set for a sustained recovery over the next two years as the market has responded to the low prices by cutting production and shifting it to a balanced position,’’ chief executive Craig Parry said. “We estimate some 25 million tonnes of production cutbacks have been announced globally and there is potential for more cutbacks in China.

“With global steel production growing consistently at over 2.5 per cent per annum, the demand is clearly there, and with these cutbacks in place there should be growing price tension in the foreseeable future.

“In addition, we are seeing renewed interest from major resource funds in the sector, which suggests a major turnaround in sentiment,’’ Mr Parry said.

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Miners face threat of coal ban from China

THE AUSTRALIAN SEPTEMBER 15, 2014 12:00AM

Sarah-Jane Tasker

Reporter
Sydney

AUSTRALIA’S thermal coal miners, already struggling to turn a profit, could be further hit with an import ban on lower quality coal by China.

The price of thermal coal has come under renewed pressure amid fears that the economic powerhouse would implement quality-based restrictions on coal imports, which could impact ­almost half of Australia’s exports to the Asian giant.

Macquarie analyst Stefan ­Ljubisavljevic has outlined that while he remained sceptical that the proposed ban on high-ash, high-sulphur material would be enacted, on a “worst-case-scenario” basis it was Australia’s miners that would suffer.

The ban, proposed by the China National Coal Association and being scrutinised by the ­National Development and Reform Commission, would prohibit all coal imports above 15 per cent ash and 0.6 per cent sulphur.

“Based on Wood Mackenzie data, almost half of all Australian exportable thermal coal would not meet a 15 per cent ash and 0.6 per cent sulphur cut-off. As a result, implementation of this draft ban would, in our opinion, put at risk about 40 million tonnes per annum of Australian coal volume,” Mr Ljubi­savljevic said.

The Macquarie analyst said that if the ban was enacted, the best-case scenario for the thermal coal market would be that exports from Russia and Indonesia would simply be redirected to China from other destinations. Australian and South African material would then be redirected to all other buyers.

“However, in practice, things wouldn’t nearly be as simple, given that the policy impacts all supply regions to a greater or lesser extent, and given that the stated objective behind such a Chinese policy is to ‘restore balance’ to the domestic coal industry,” Mr Ljubisavljevic said.

“This is often then combined with the broader Chinese goal of addressing pollution. In other words, overall thermal coal ­imports should fall.”

Citi’s Ivan Szpakowski also ­remained sceptical about the proposed ban but he also believed Australian exports with high ash content would be most vulnerable.

“Sulphur and ash limits do have the potential to curtail sales from some mines, particularly as washing and blending costs are likely to be prohibitive in many cases at current prices,” he said.

The price of thermal coal is down about 22 per cent on the past year and is sitting at its lowest level since the second half of 2009. At its peak, thermal coal was priced at about $US120 a tonne but it has fallen to about $US66 a tonne for coal shipped through Newcastle.

Rio’s global energy boss, Harry Kenyon-Slaney, has warned of a continued challenging environment for the thermal coal market,

“All the coal producers here and around the world have taken an axe to their costs to survive and they will have to continue to do that over the foreseeable future,” Mr Kenyon-Slaney said.

The Bureau of Resources and Energy Economics outlined in its latest quarterly report that although coal consumption in key Asia-Pacific markets was increasing, coal prices were expected to remain subdued throughout the rest of the year in response to a continued abundance of supply.

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China bans 'dirty' coal sales, imports
AAP SEPTEMBER 16, 2014 9:30PM

China will ban the sale and import of "dirty" coal in less than four months, a top government body said, in an anti-pollution move that could have repercussions for key exporters including Australia.

Coal with sulphur content of more than three per cent and ash content of more than 40 per cent will no longer be permitted as of January 1, according to a notice posted late Monday on the website of China's powerful National Development and Reform Commission (NDRC), the country's top economic planner.

The Chinese government made the move "in an effort to improve air quality in its major cities", the official Xinhua news agency reported Tuesday.

China's three decades of rapid industrialisation have transformed its economy and seen incomes soar, but have also brought severe environmental consequences including smog that regularly blankets its cities.

Much of that pollution is driven by the Asian giant's heavy reliance on coal.

China is the world's largest consumer of coal, accounting for around half of global consumption.

Seeking to address mounting public concern about the environment, Chinese Premier Li Keqiang in March said that China "will declare war against pollution and fight it with the same determination we battled poverty".

The government will shut down 50,000 small coal-fired furnaces this year, clean up coal-burning power plants and remove six million high-emission vehicles from the roads, Li said.

Australia - whose economic growth has been fuelled in part by Chinese demand for energy and raw materials - may feel the brunt of the impact of Beijing's latest move.

The country exports 50 million tonnes of thermal coal a year to China, according to Xinhua.

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BREE chief Calder expects iron ore prices will recover
THE AUSTRALIAN SEPTEMBER 18, 2014 12:00AM

David Uren

Economics Editor
Canberra
DEMAND for Australia’s key resources is still strengthening and the current weakness in prices will not be sustained, according to the government’s chief minerals adviser.

The Bureau of Resources and Energy Economics expects iron ore prices will recover to a trading range of $US90-$US95 a tonne over the next five years as China’s steel production rises from about 800 million tonnes now to reach 900-950 million tonnes a year.

The bureau’s executive director, Wayne Calder, is also confident about the outlook for the coal industry, with big increases in electricity generation capacity across Asia being based on coal-fired power stations.

Mr Calder said moves by China to restrict imports of low-quality coal would have no significant impact on Australian exports.

“We export 194 million tonnes of thermal coal of which 47 million tonnes will be going into China.”

Little more than half the shipments to China could be affected and it was far from certain they would be. Miners could also take steps to raise the quality of the coal they ship.

He said Australia had the potential to diversify its markets. India was bringing on 100 gigawatts of coal-fired power, while China had 23 gigawatts under construction and another 49 giga­watts planned.

“Vietnam, Thailand and a lot of other nations in Southeast Asia are increasing their demand for coal, producing more electricity to improve the welfare of their communities, so there is an upside for coal.”

Mr Calder acknowledged coalminers were facing challenges.

Australian miners faced “take-or-pay” contracts with rail authorities trying to maximise their output in an effort to lower unit costs, but this was increasing the downward pressure on prices.

In the case of iron ore, Mr Calder emphasised the volatility of the iron ore market since benchmark pricing was abolished in 2010, with price swings of 30 per cent or more within the commodity’s natural cycle.

The market has been affected by the rapid ramp-up in supply, with 200 million tonnes of capacity coming on stream in Australia over the last 12 months. “We still see demand growing, but it has slowed somewhat.”

The addition of Gina Rinehart’s Roy Hill mine and further expansions at Rio Tinto, BHP-Billiton and Fortescue would add another 100 million tonnes to supply capacity over the next two to three years, while Brazil’s Vale would also add about 100 million tonnes. The ample supply means Chinese mills feel under less pressure to maintain stocks of iron ore.

However, he pointed out that there is scope for high-cost seaborne iron ore to withdraw from the market. “China is still importing iron ore from places like the Ukraine, Iran and Peru,” he said.

BREE also expects high-cost Chinese mines, which have remained in production despite prices dropping below their cash costs, to close over the northern winter. “We won’t expect to see them open again,” Mr Calder said.

He said he did not rule out the possibility, suggested by some analysts, that iron ore prices could drop to the low $US70s for a time.

“It could go down that far, but we couldn’t see it being sustained at that sort of price level. We still expect a downturn in price. The peaks won’t be as high and the troughs will be a bit lower.”

Australia could still expect to see good growth in its mineral export returns, with volume growth offsetting price weakness. The first of the Queensland LNG plants would start producing by the end of this year and by 2018-19 Australia’s LNG exports would rise from 24 million tonnes to 85 million tonnes, making it the largest LNG exporter globally.

BREE will release its quarterly outlook next week.

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Mines to shut 'every two to three weeks'

Amanda Saunders
550 words
19 Sep 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
AngloAmerican chief Mark Cutifani said he expects metallurgical coalmines will be mothballed at a rate of one every two or three weeks until enough supply has fallen out of the beleaguered sector to drive a price recovery.

AngloAmerican is Australia's ­second-biggest producer of metallurgical coal, and last week announced it was putting its Peace River coalmine in British Columbia, Canada, on care and maintenance, citing poor prices for the commodity.

Mr Cutifani expected other pro­ducers around the globe, including in Australia, to follow suit, saying: "I suspect others will have to do fairly similar moves to keep themselves whole."

Hard coking coal spot prices have fallen to about $US115 a tonne from well over $US300 in the heady days of 2011. The market is in oversupply and Mr Cutifani said: "If the price is not north of $US150, you've got stress right across the industry.

"We've been seeing some pro­duction come out of the market, 20 to 30 million tonnes.

"We've dropped another 2.5 million tonnes out of the met coal market with the closure of Peace River. I think you are going to continue to see some of those announcements, maybe once every two or three weeks.Everyone's doing it tough

"It won't make much of a difference this side of the year end, but as we go into next year, I am hoping it will start to make a difference."

He said more than 50 million tonnes would need to disappear from the ­global market "to have any sort of meaning".

"I think everybody is doing it tough in met coal, even the markets and our customers are saying there needs to be a higher met coal price, but people keep throwing volume into the market.

"So, at the end of the day, until production that is not making money starts to be turned off, prices will remain tight."

Peace River is AngloAmerican's only met coal operation outside ­Australia, where it has six mines, mainly in Queensland.

Mr Cutifani stressed that Anglo­American was in metallurgical coal for the long haul, and although the mining giant had fielded approaches for its Australian operations, it was not a seller.

AngloAmerican had shaved $US20 a tonne from costs across its coal operations, "turning our business into one of the most competitive in the world".Making the hard call

Mr Cutifani said many of Anglo­American's compe­titors were staying open because they were caught by take-or-pay rail contracts, which require miners to pay a fixed amount for a certain tonnage of coal, regardless of whether they ship it or not.

"There are those that are losing a lot of money hanging in there because of their take-or-pay contracts, [but] at some point they wind out, and guys will have to make tough calls," he said.

He said the end-game was for AngloAmerican to emerge from the current malaise with greater market share, after less viable producers had been forced out.

"We still think it's a good long-term business but, at the moment, like in iron ore, there is more volume than the market can digest," Mr Cutifani said.


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Coal comfort in the small print

Matthew Stevens
1347 words
18 Sep 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Matthew Stevens

If a week is a long time in politics, then just a day can be an eternity in coal. Wednesday in Sydney dawned to newspaper headlines announcing that China was dumping "our dirty coal".

This conclusion was fuelled by the release of a concert of Chinese government edicts that aim to better control its swelling national coal diet. And, given coal is Australia's second-biggest export earner and China our second-biggest thermal coal customer, the implications of this regulated loss of appetite appeared dire indeed.

By sunset, though, after further translation and more prudent assessment of the latest draft guidelines for coal quality released by the National Development and Reform Commission, the outlook was somewhat less than cataclysmic.

So the day that opened with up to 80 per cent of Australia's thermal coal shipments to China at immediate risk ended with the comforting reassessment that the new rules would have marginal short-term effect here and that Australian thermal coal's medium-term outlook had actually improved.

To understand this confusion, you only have to read the regime that is now publicly contemplated by the NDRC. The new regime will ban the use of some coals altogether, limit how far other coals can be transported from mines or ports, and further limit the use of other grades of coal in regions of high-density population and industry.

The markers for these regulations will be ash and sulphur content. That is because China's government is determined to improve the air quality in and around its major cities.

Brown coal has very high levels of ash and sulphur, so its use will be banned. The use of black coal with ash content higher than 30 per cent or sulphur content higher than 3 per cent will also be banned.

Australian coal clears those hurdles, so this rule doesn't matter to our exporters. And the rule putting a 600-kilometre limit on the transport of certain coals doesn't either.

But the third layer of the regulation appeared to matter a whole lot. The proposition is that coal with ash content higher than 16 per cent or sulphur content of more than 1 per cent would be banned from China's three brightest economic hot spots.

This proposition represents a considerable step up from the original idea floated back in December, which aimed to lock out sub-premium coals from the northern urban pools of Beijing, Tianjin and Hebei.

But Monday's announcement added the Pearl and Yangtze deltas to the centres of quality control. And, according to the energy industry's analyst of choice, Wood Mackenzie, the broadening of the control group left at risk up to 90 million tonnes of thermal coal that China currently imports from Australia, Vietnam, North Korea and South Africa.

There could be no question that this threshold presented a challenge for Australian coal exporters. While a fair cohort of our thermal coal sits comfortably within those specifications, there is an awful lot that does not.

Australia's biggest coal producer these days is Glencore and most of its thermal coal has an ash content higher than 20 per cent.

With two caveats, Wood Mackenzie reported that 39 million tonnes (mt) of high-ash Australian coal would not slip under the threshold.

In a note that bounced rapidly around the coal world, the firm assessed that the new regime threatened 20 per cent of exports from Newcastle and put at risk more than 10mt of Glencore exports, about 6mt of BHP product and maybe 5mt of Rio output.

For some others named in WoodMac's list of Australia's top 10 most affected, the implications were life-threatening.

Ah, but what were those caveats again? "Some significant uncertainties remain regarding the new coal quality guidelines and consequently the scale of the impact," the report noted.

"The largest of these uncertainties is how the restrictions will apply to utilities, with the possibility sulphur requirements could be relaxed for utilities with de-sulphurisation equipment, or possibly that the guidelines will not apply to utilities at all and only to industrial and household users.

"The other major uncertainty is to what extent and at what locations producers and traders will be able to blend coal to meet the new requirements."

As it turned out, Tuesday's uncertainties were Wednesday's salvation. By mid-afternoon, having tapped fully the advice of its most senior membership, the Minerals Council of Australia began circulating a briefing note to its various constituencies.

The MCA advised that these regulations refer to what is colloquially known as "San Coal" – coal used for small boilers, domestic heating, some hotels and restaurants – not large-scale power plants or other industrial users. This is to address smog concerns within the cities.

"These antiquated boilers and generators are being replaced with larger, newer power stations, with advanced pollution controls, away from the urban areas," the MCA said. "We are not aware that Australian coal is supplied in these markets."

To be clear, these are changes aimed exclusively at removing heavy particulates and sulphur from the air that people breathe and the associated health problems among a broad community of China's city dwellers.

It might disappoint the anti-coal lobby, but these reforms are not aimed at climate change mitigation, nor do they aim to restrain coal's role in China's power equation.

How can I be sure of that?

Firstly, because the proposed regime does not discriminate on calorific content. Australia's high-ash coals are a fuel of choice because they are higher-calorific coals. So you have to burn less of them than, say, the lower-ash, lower-calorific coals that come out of Indonesia.

Secondly, there is literally no way that China can meet the expected growth in demand for electrical power without a continued roll-out of its fleet of "ultra-super critical" coal-fired power stations.

The sophistication of China's power industry is not well appreciated. Coal fires about 80 per cent of China's power output and that figure is unlikely to wither meaningfully any time soon.

More than 90 per cent of China's coal-fired baseload capacity has leading-edge emission-mitigation technologies. And that proportion is only going to rise.

So why is the air quality in China's big cities so poor? Because too many people use the wrong quality of coal for too many things. The problem there goes well beyond the sort of low-level commercial users claimed to be the target of the NDRC.

For example, more than 50 per cent of China's homes still rely on burning coal or bio-fuels for heating and cooking. The ash content of their fuel concerns them not one jot.

But, for the moment at least, there is evidence enough for Australia's coal exporters to remain reasonably sanguine about the NDRC's reform mission.

Yes, it is the latest of three recent coal reform initiatives that aim to alter the balance of the seaborne coal trade to China.

The first was the introduction of a tax on import coking coal, the second was a directive to nominated power stations to reduce imports of coal through a quota system, and now we have the air quality piece.

But the net effect of that is not to reduce coal in use, but rather to improve the quality of what is being used and potentially force an increase in the price being paid for it.

As Citi Research identified on Wednesday, in the end, "the regulations are far milder for coal imports than the market had feared . . . In fact, they are likely to have a greater impact on domestic supply, supporting Chinese prices."

Why would China want to do that? Well, the coal industry is a huge employer in China and the effect of the glut of global supply is that prices are now too low to support a lot of the Middle Kingdom's domestic suppliers.


Fairfax Media Management Pty Limited

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China coal demand 'may peak in 2016'
STAFF REPORTER SEPTEMBER 22, 2014 3:15PM

New research by the Carbon Tracker Initiative (CTI) today identifies major financial risks for investors in coal producers around the world, from the domino effect of slowing demand growth in China, where thermal coal demand could peak as early as 2016.

CTI’s latest analysis highlights $US112 billion of future coal mine expansion and development that is excess to requirements under lower demand forecasts. In particular it shows that high-cost new mines are not economic at today’s prices and are unlikely to generate returns for investors in the future. Companies most exposed to low coal demand are those developing new projects, focused on the export market.

With new measures to cap coal use and restrict imports of low quality coal in China, it appears the tide is turning against the coal exporters. The Institute of Economics and Financial Analysis (IEEFA)’s demand analysis shows how China’s coal demand could surprise people by peaking in 2016 and then decline gradually thereafter, driven by efficiency measures, increased renewables, hydro, gas and nuclear and tougher policies to cut air pollution.

China’s desire to reduce imports will cascade through the seaborne market, impacting prices and asset values for export mines in the US, Australia, Indonesia and South Africa. The rapid displacement of coal in the US domestic market has seen US producers try and switch to exporting, but that window is already starting to close.

The implication is that Chinese carbon dioxide emissions may peak before 2020, given that these emissions have historically tracked coal demand so closely. Such a peaking would send a powerful message that all countries can target strong, cleaner economic growth, reduce poverty and manage their carbon emissions at the same time.

“The world’s coal industry is playing musical chairs with demand – every time the music stops another piece of the market is being taken away.” James Leaton, Research Director, CTI.

The European Union’s Energy Roadmap to 2050 and the US Environmental Protection Agency’s recent Clean Power Plan show that the construction of new coal plants will be severely constrained in Westernmarkets. Meanwhile, the world’s biggest producer and consumer, China, has indicated a potential coal cap in its next five-year plan starting in 2016. And India has to overcome infrastructure and financial constraints if it wants to import greater volumes of coal. Coal producers around the world are relying on a flawed assumption of insatiable coal demand in China. The business model for coal looks on shaky ground without that demand.

“King Coal is becoming King Canute, as the industry struggles to turn back the tide of reducing demand, falling prices and lower earnings.” Anthony Hobley, CEO, CTI CTI’s analysis shows that in a low demand scenario the seaborne coal market will account for an average of 850 million tonnes per year over the next 20 years. Such a scenario will require production only up to a breakeven price of $US75/tonne. This means mines with costs higher than this will not provide investors with a decent level of return (Australian Newcastle FOB export coal price was $US68/tonne - 1 August, 2014).

“We see a low demand scenario leading to a $US75/tonne peak break-even price for profitable new development in seaborne markets – companies and investors need to understand their exposure to projects higher up the cost curve," said Mark Fulton, founder, ETA.

The CTI analysis shows that some of the world’s biggest greenfield coal projects in Australia’s Galilee Basin are already out of the money under a low-demand scenario. In the US, the potential expansion of mines in the Powder River Basin also has challenging economics. These areas also require major investment in infrastructure to deliver production to the Pacific market, and new ports on the US West coast and adjacent to the Australian Great Barrier Reef have all faced opposition.

"The world is changing for the fossil fuel industry, especially the coal sector which is facing a shrinking demand window. Investors want assurances that capital is not being spent on high-cost, high-carbon projects that may not be competitive as global coal demand declines." Mindy Lubber, President, Ceres.

This article was first published in The Australian.