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Editorial comment

What is China up to? It’s a question that many in the coal industry must be asking after a busy few months for the government in Beijing have seen the introduction of a ban on low-rank coal imports, the reintroduction of coal import tariffs, an enforced domestic production cut and orders for state-owned power companies to cut Q4 imports.

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A couple of trends can be seen running through the actions. Perhaps the most talked about of these is the government’s apparent desire to reduce levels of pollution – particularly in China’s biggest cities where smog levels are a focus for popular protest. For example, in August, Reuters reported that Beijing had cut its coal use by 7% in the first six months of the year as part of the “war on pollution” declared by the central government. By 2017, the city could have cut coal use to less than 10 million t from 19 million t in 2013.

In China as a whole, coal use dropped by 1 – 2% in the nine months to September, according to analysis by Greenpeace – the first drop in demand this century and a sharp contrast to the 5 – 10% growth rates that we have been accustomed to. In the medium term, Beijing plans to cut coal’s role in the energy mix from 67% in 2012 to 60% in 2020.

The economy could help achieve these environmental goals. Weaker economic growth led to an outright drop in power demand in August, according to Bank of America Merrill Lynch (BofA ML), while strong hydropower generation pushed out higher-cost coal generation in Q3. In the long term, there is also a structural shift, with China moving away from growth based on energy-intensive heavy industry to growth based on services.

This has led some in the environmental movement to herald the beginning of the end of coal in China. Earlier this year, the Carbon Tracker Initiative (CTI) and the Institute for Energy Economics and Financial Analysis (IEEFA) predicted global and Chinese coal demand would peak in 2016, arguing: “the coal industry has dramatically underestimated China’s intent to improve energy security through electricity system diversity and to drive rapidly towards a lower energy intensity of growth.”

This seems optimistic to the point of delusional, as “China: the illusion of peak coal”, a recent report from Wood Mackenzie, has recently argued. This notes that, despite aggressive investment in alternative energy sources and a rapid improvement in energy efficiency, demand for energy is still likely to increase to 2030. And in the Chinese context, that will still mean demand for coal.

But how much coal? Wood Mackenzie forecasts a doubling of coal demand to 2030 – but if the CTI/IEEFA report seems too optimistic one way, this is surely overdoing it the other. A belief in China’s insatiable appetite for coal is much to blame for the current glut in supply – supply that keeps growing, as coal mines planned in the boom years come online. It would not be wise for the industry to make the same mistake twice. We are on safer ground looking to the short-term prospects and here it seems likely that Chinese demand will remain soft going into next year, bringing further downside risk to thermal coal prices. BofA ML reckons US$ 55/t is possible for Newcastle coal, particularly if global growth disappoints or new Chinese policies soften its demand further. That level may prove the final prompt for significant market rebalancing as a lot of Australian production will fall into the red. In the meantime, it looks like there’s another tough year ahead.