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Chinese plans pose huge risk to coal investors

World Coal,

A new report has noted that China’s planned shift away from coal puts up to US$ 21 billion of investments at risk.

China's increasing efforts to reduce coal use and move to cleaner fuels is a worry for investors, who have benefited from the Asian powerhouse’s heavy reliance on coal to fuel its economic growth over the past three decades. China now burns half the coal that the world consumes each year.

Data analysts at the World Resources Institute have stressed in their own recent report, on global coal risk assessment, that “China accounts for 46% of global coal consumption […] the demands of global coal trade are now firmly in the pacific market.”

But a nationwide pollution crisis in China, increasing water scarcity and growing concerns over climate change mean Beijing wants to shift to cleaner energy sources. Analysts expect China's coal consumption to peak sometime between 2020 and 2030.

A quick shift, aided by a slower growing economy, would leave assets worth billions at risk of being unprofitable, according to the report by think-tank the Carbon Tracker Initiative and the Association for Sustainable and Responsible Investment in Asia. The title of the report is “The Great Coal Cap: China’s energy policies and the financial implications for thermal coal”.

The report reminds readers that China is no longer as coal hungry as it once was” “China’s coal demand is changing Since 2005 a decoupling of China’s total coal demand from GDP appears to be occurring. A closer look reveals that year-on-year, China’s coal consumption growth is slowing - with 2012 the lowest increase for a decade. This reflects declining absolute coal consumption in 10 of China’s 30 provinces.”

"Lower-than-expected Chinese thermal coal demand threatens to leave those investors not actively assessing their Chinese coal holdings bearing the brunt of stranded assets and wasted capital," the report said.

Chinese coal companies spent around US$ 21 billion in 2013 on exploring and developing coal resources, despite a government push to use more natural gas, nuclear power and renewables to generate power.

Based on estimates from the International Energy Agency for coal demand in 2020 under "business as usual" and “new policies” scenarios, the report said that up to 436 GW of installed coal capacity could be at risk in 2020.

That would equal 40% of expected installed capacity by that year. The report said companies such as Shanxi Coal International

Energy Group and Datang International Power Generation Co were at risk from high debt levels amid falling coal prices, while poor quality of coal produced by China Coal Energy Co could put that company at risk, if there were strategic shutdowns.

Falling consumption would also have an impact on coal producers worldwide, because China is the world’s biggest coal importer, the report said. In particular, the authors of the report stressed that investors in Australia and Indonesia should pay particular heed to the warnings.

China plans to cap its coal consumption from 2015 at 3.9 billion t and has banned the construction of new coal-fired power plants in the region surrounding Beijing, as well as in the Yangtze and Pearl river deltas. Those regions have been told to make absolute cuts in consumption.

In the latest Inside Dry Freight report from Thomson Reuters, the authors note that at a conference earlier this week, He Jiankun, a climate advisor to the Chinese Government, said he expected consumption at around 4 – 4.5 billion t between 2020 and 2025. 

Written by Sam Dodson

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