Hogsback on China

THE world of coal – if not everything else – revolves around China.
Hogsback on China Hogsback on China Hogsback on China Hogsback on China Hogsback on China

Lou Caruana

Not only is China the biggest producer and consumer of coal, its economic and environmental policies have profound impacts on the Australian coal industry.

It’s a case of when Beijing sneezes Mackay catches double-pneumonia.

China produces almost 4 billion tonnes of coal annually, which accounts for about half the world’s output. Australia, the world’s largest exporter of coal, only produces 644 million tonnes of coal a year.  

China is the largest coal consumer, accounting for 49% of the world's total coal, according to the US Energy Information Administration.

“Coal accounts for most of China's energy consumption, and coal has maintained an approximate 70% share of Chinese consumption since at least 1980, the starting date for EIA's global coal data,” the EIA said. “By way of comparison, coal was 18% of US energy use and 28% of global energy use in 2012.”

Those placard-waving demonstrators who think they are saving the planet by protesting in front of the Commonwealth Bank or harassing Queensland Premier Annastacia Palaszczuk need to know that stopping Adani’s proposed Carmichael coal mine or even eradicating coal mining from Australia all together is not going to mean much while China continues to mine and consume coal.

So great is the impact of the Chinese economy on coal, that pronouncements by the central government on matters of air quality in Beijing are enough to send prices in a spin.  

According to an ANZ Bank report, metallurgical and thermal coal prices look likely to diverge in coming months as Chinese government policy measures start to have a differing impact on the two main coal markets.

It said demand for coking coal had already started to wane as China restricted steel production over the winter.

 “At the same time, domestic supply constraints should keep thermal coal prices elevated,” the report stated. 

“We envisage the spread between the two coal types falling back to long-term averages in the short term.”

According to the report the downside risks in the thermal coal market have subsided, with prices likely to remain anchored around US$100 a tonne. 

“China’s better-than-expected economic growth has seen growth in electricity generation remain at elevated levels,” it said.

The report said the outlook in the metallurgical coal market was decidedly different.

“With the government forcing mills in central China to operate at utilisation rates of below 50%, demand for coking coal has started to fall,” it said.

“Coke production fell 6.1% year-on-year in September, following a 5.7% year-on-year fall in August. Compounding the weak demand outlook has been a pickup in supply in the seaborne market.”

While it would be easy for Australian industry watchers to focus on recent machinations such as the Finkel report, the future of the Liddell power station, and Adani’s Carmichael mine, Hogsback reckons it might be more useful to read the tea leaves from the Middle Kingdom.