Is China Really Australian Coal’s Promised Land?

March 3, 2013 - PRLog -- Research by coal industry analyst IHS CERA asked: "Can we reasonably assume that Chinese coal import growth of 10-14Mtpa will be sustained through the next couple of decades?"

The study, "Coal Rush: The Future of China's Coal Market", is not confident and begins with the key hypothesis that China is quite capable of supplying its own coal needs "at very reasonable costs by global standards".

The coal researcher points to changes over the past decade, with productive capacity for all types of coal almost quadrupled to over 4Btpa as a result of significant investment; high-volume, low-cost mines becoming the norm; domestic mining cost escalations slowing; and cheap inland coal soon to be released as transport bottlenecks are removed.

IHS CERA senior research manager Zhou Xizhou said China would become even more market-oriented, but demand growth was expected to slow as a result of factors including moderating economic growth and fuel diversification.

"We expect raw coal demand to peak around 2025, at about 5.1Bt, from about 3.7Bt in 2011," he said. "This represents an annual average growth rate of 2.4%, compared with the average growth rate of the past decade of 10%.

"Steam coal demand peaks around 2027, reaching about 4.3Bt, before gradually declining thereafter. In particular, coastal demand – a key growth point during the past decade – peaks before 2020."

But China did not lack coal resources.

"New productive capacity has been continuously added as a result of the heavy investment in recent years in the mining sector: aggregately, Inner Mongolia, Shanxi, Xinjiang, and Shaanxi [will] increase their raw coal production by about 1.8Bt by 2035," Xizhou said.

"Xinjiang experiences the fastest supply growth, and Inner Mongolia starts to become the new production growth area during the latter part of our outlook period. Meanwhile, the significant investment made by global miners in key coal-producing countries also starts to release new capacity to the market."

And removing transportation bottlenecks was creating a much more liquid market.

"As more railways and transmission lines come online to link the key production regions to the coast, large volumes of previously stranded domestic coal are released by expanded railways or 'coal-by-wire' power generation, reducing the logistic cost that has led to high delivered prices," Xizhou said.

"During the next five years, we expect 800Mt of new coal-carrying railway capacity, removing bottlenecks that have existed since the mid-2000s.

"The grid companies' ambitious high-voltage transmission program brings more 'coal-by-wire' to demand centres in the form of electricity generated near mines over the next two decades.

"Many heavy industries start to migrate inland, further easing the bottleneck. Coastal provinces become the price-setting region for the domestic sector as a much more liquid coal market emerges. At the same time China's influence on the international market will continue to increase."

What does this mean for Australia?

Xizhou sees Australia populating the high-quality and boutique coal corner of the seaborne trade.

"Australia has access to almost all grades of coal, from low volatile material in southern Queensland to high-grade steam coals throughout NSW and Queensland and metallurgical grades in Queensland and NSW," he said.

"Australian producers, particularly those in NSW, have become adept at preparing different grades for whichever markets tend to be offering the best rewards, normally focusing heavily on maximizing the amount of higher-priced metallurgical coals for the international market.

"This has also given rise to the selective preparation of high-grade steam coals, chiefly for the Japanese market, and low-rank coals for the Chinese, Korean, and Indian markets. The low-grade coals tend to have been washed to much higher ash content, or not washed at all, and to include discard from metallurgical coal washing."

Xizhou said mines supplying multiple products could often cross-subsidize thermal sales.

He figures the majority of coal in Australia is produced by surface or longwall mining, with productivity typically around 10,000–14,000Mt per man-year for the former and 7,000–9,000 for the latter, with significant variations. Wage costs average A$15–17/t and free-on-board costs $60–90/t.

He sums up: "China's market for steam coal imports should stop expanding in the next few years, before declining through the 2020s and 2030s.

"That suggests supplies are available without pushing marginal costs any further up than had already been assumed; this is the case given the infrastructure debottlenecking in the domestic market that is releasing cheap productive capacity to the central and coastal regions.

"Our outlook points to a peak in Chinese steam coal imports before 2020. As new railroads are built over the next few years, new supply volumes flood to coastal market while demand growth moderates significantly.

"Fierce competition among producers results in downward pressure on prices, leading real prices to drop during this period, with domestic producers winning this battle by and large, owing to their cost flexibility. As a result, import volumes drop significantly during 2015–20 as the market enters the downward part of the cycle.

"When the market begins to rationalize in the early 2020s, and the decline in imports decelerates, the cycle is due to enter another 'boom' phase. However, this phase does not start owing to China's own shale gale, which commences in the early 2020s.

"This leads to substantial fuel switching in key coal-consuming sectors such as power, resulting in much weaker coal consumption and a peak in overall demand. As a result, imports are further squeezed post-2025."

This article first appeared in the Australian Coal Report. Energy Publishing Asia Pacific is a Brisbane-based internationally renowned publisher of leading coal industry publications and reports covering Asia Pacific. In addition to the weekly Australian Coal Report, our publications include the weekly Coalfax, Indian Coal Report, South African Coal Report, and importantly, we also deliver key market price indicators for all regions, including the Newcastle Export Index (NEX) and the world's first Coking Coal Index as well as a Database of Prices & Indices.

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