A ban on imports of poor quality coal into China may push already strained Australian mines to the wall as China looks to prop up its own mines.
Earlier this week, China said it intended to prevent the importing of coal with high levels of ash and sulphur into the main urban areas around Beijing, the Yangtze river delta and the Pearl River delta, which is near Hong Kong.
The new rules would stop coal with more than 16 per cent ash from being imported into these areas, which will hit a number of exporters in the Hunter Valley in particular.
Those mines affected by the tougher regulations could wash the coal, which would add an estimated $3 a tonne – or around 4 per cent – to their costs, at a time when it is estimated that as many as one-third of all coal mines are already losing money. This has resulted in close to 10,000 jobs being lost across the industry so far in the latest downturn.
The Bureau of Resource Economics estimates that as much as 13 per cent of exports of thermal coal, which is used mostly to produce electricity, could be at risk due to the China ban.
"Overall we are exporting about 194 million tonnes of thermal coal, and our assessment is that there will be limited impact with only 20 million to 25 million tonnes of coal will be potentially impacted by those restrictions," Wayne Calder of the Bureau of Resource Economics said. This is equal to as much as 13 per cent of thermal coal exports, valued at more than $US1.75 billion.
"The coal producers ... can still undertake actions such as washing or blending so that they will still be able to meet the restrictions the Chinese have imposed.
"We export about 47 million tonnes to China out of that 194 million tonnes of total thermal coal exports. While China is a valued export market Japan is still our largest market for coal, Korea is a very substantial market as well, and in the future we are going to see India grow very strongly."
A detailed analysis by influential industry consultant Wood Mackenzie has made it clear Indonesian will be the prime beneficiary of the change, even though it generally produces a poorer quality coal than Australia.
"The quality restrictions apply to both imported and domestic coal and therefore will increase demand for imported coal because imported coal is generally lower ash and sulphur than domestic coal. Indonesian exports are generally low sulphur and ash and consequently will stand to benefit from the ban."
This report also noted that Australian miners could meet the tougher standards, although the "associated increase in cost would threaten the economics of these exports".
Within China, the new quality standards are seen as an attempt to bail out local coal producers.
"Most of the evidence that we see is to do with protectionism, to me what we're seeing this year is just a continuation," J Capital Research analyst Susannah Kroeber said following the disclosure of the new standards. "There's been a massive oversupply and very high inventory levels in all of the inland coal-producing provinces."
China's electricity output, a reliable barometer for economic activity, fell by 2 per cent last month, the first such decline in four years, strengthening concerns China will struggle to meet its 7.5 per cent economic growth target for the year. Thermal power dropped 11 per cent, and coal imports are already 5 per cent lower than the same time last year.
The head of Glencore's local coal operations Mick Buffier recently said as many as one in three local coalmines are losing money, hit by the downturn in prices and the strong Australian dollar.
