China, World's Biggest Thermal Coal Burner, Paying the Price

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Commodities, Environment

What is good for the inhabitants of Beijing, Tianjin and just about all the principal northeastern Chinese cities may be bad for investors, in a slew of thermal coal mining projects in places like Australia, Indonesia and Mozambique.

Anyone who has spent any time in China will be familiar with the choking pollution, ever-present and often dangerously intense in many Chinese cities. Indeed, so bad has the problem been in recent years that the government senses it is a source of social unrest with potentially damaging consequences for their authority, and hence stringent efforts are being made to reduce the principal source – namely thermal coal-fired power stations.

Emphasis is being placed on hydro, nuclear and natural gas for new power plants, a Reuters article explains. This is a major shift for a country that built an average of two coal-fired power plants every week in the last decade, and went from net coal exporter in 2009 to the world’s top coal importer just two years later.

China burns nearly as much coal as the rest of the world combined. The massive jump in coal use – to 3.8 billion tons in 2012 from 2.5 billion tons in 2006 – has driven prices of benchmark Asian thermal coal to average $121 a ton in 2011, from less than $50 five years earlier. But a raft of new mines has increased supply and prices fell to near $80 a ton in October 2012 and have remained below $100 since.

After growth in seaborne coal trade of 7% per year from 2007 to 2012, Goldman Sachs expects growth to now be just 1% until 2017.

Meanwhile, changes within China could herald a further development for global prices. Beijing is mulling proposals to scrap a 10% coal export tariff, according to the Reuters article, a move which could easily see exports jump four-fold to the annual quota of 38 million tons as Chinese coal becomes more competitive.

Plans by the railway ministry to double the volume of coal carried on dedicated railroads to 2.4 billion metric tons by 2015 will cut production costs, since railway tariffs cost about 0.15 yuan per ton for each kilometer, less than half the cost of around 0.35 yuan by truck. More coal moving by rail will cut China’s average production cost for thermal coal in the next 2-3 years by $10-$15 a ton to $80-90, including value-added tax, according to Reuters’ sources.

To be continued in Part Two.

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