Coal news and updates

The Australian coal industry response to China's decision to impose tariffs on imports was rapid and predictable, and ultimately shows the sector is still suffering from reality denial.

 

The decision by Beijing to levy a duty of 6 percent on thermal coal and 3 percent on coking coal imports from Oct. 15 certainly is yet another blow to Australia's already beleaguered coal miners.

 

They will suffer disproportionately as the tariffs won't affect shipments from rival Indonesia, given it enjoys a free-trade agreement with China through being part of the Association of Southeast Asian Nations (ASEAN).

 

The Minerals Council of Australia called the move "counterproductive" in a statement, adding that it will increase domestic energy costs in China, as well as raise the stakes in the free-trade agreement that Canberra is currently negotiating with Beijing.

 

China's decision to reinstate the 6 percent thermal coal tariff it scrapped in 2007 is largely viewed as a measure to protect the domestic mining industry, which, like its Australian and Indonesian counterparts, is largely unprofitable at current prices.

 

Spot thermal coal at Australia's Newcastle port , an Asian benchmark, fell to a fresh five-year low of $64.91 a tonne last week, down 25 percent since the start of the year and less than half the post-2008 recession peak of $136.30 reached in January 2011.

 

The Melbourne Age newspaper said the Chinese decision was a "shock," but the warning signs have been evident for some time, with the Chinese coal sector calling for assistance measures for months, warning that 70 percent of their output was loss-making.

 

It also became clear that the pollution-control measures announced last month weren't going to impact coal imports much, given the power-generation sector was exempted from the more stringent quality.

 

This made the imposition of tariffs one of the most likely tools to restrict imports, especially after Beijing asked power companies to cut imports by as much as 40 million tonnes from September to December.

 

China's total coal imports were 201.67 million tonnes in the first eight months of the year, a drop of 5.3 percent on the same period last year.

 

However, Australia had managed to increase its share of China's imports, with 61.07 million tonnes in the first eight months, a gain of 9.3 percent.

 

In contrast, Indonesia's year-to-date imports were down 25 percent to 33.8 million tonnes.

 

The imposition of the tariff and Beijing's call for import restraint make it likely that Australian exports will come under pressure in the last quarter of this year.

 

OVERSUPPLY THE ELEPHANT IN THE ROOM

 

But the industry should be looking beyond the short-term impact of the tariffs, and look at the bigger picture.

 

Global coal prices have slumped because miners brought on too much supply in the past few years, most likely in the belief that the optimistic assumptions about the rapid growth of China's coal imports would prove accurate.

 

Instead, the reality is that China, the world's biggest importer of the fuel, is trying to limit the growth rate of coal and boost the use of cleaner fuels and renewables.

 

This isn't to say that coal use won't grow in China, it will, but at a slower pace than many expected a few years ago, when decisions were being made to invest in new mines.

 

It's also no surprise that China would move to protect what is still a vital domestic industry, and the jobs it provides.

 

Social harmony and cohesion often trump profits in China, and miners losing jobs or not being paid is something likely to have concerned Beijing.

 

The solution to everybody's woes in the coal sector is higher prices, and given the softer demand growth outlook for the next few years, the adjustment will have to be made in supply.

 

The tariff decision makes it quite explicit that China doesn't want to carry all, or indeed much, of this adjustment.

 

This means coal-producing nations will have to shoulder more of the burden of restraining supply.

 

Much of the higher-cost thermal coal, such as that from North America, has already left the seaborne market.

 

But Australian, and to some extent Indonesian, miners are continuing to produce even as profit margins evaporate and more pits become uneconomic.

 

The real message from Beijing is if you want to export to China, make sure your prices are not so low as to hurt our industry.

 

Sounds a tad counterintuitive, but removing supply to boost prices may actually result in higher Chinese imports.

 

 

Source: Reuters