Evolving energy and coal policies in China, the world's top energy user and the largest producer and consumer of coal, are impacting both domestic and global coal markets significantly, said Sarah Liu, vice president of Fenwei Energy Information Services, at the 6th International Mining and Resources Conference (IMARC) in Melbourne on October 31.
IMARC is Australia's largest mining event, bringing together over 300 leaders of global mining companies, 7000 participants from more than 100 countries. Industry portal sxcoal.com, run by Fenwei Energy, is the only media partner of IMARC in China.
It is important to keep a close watch on China's policy as China is such a big market and a 1-2% change in its supply-demand will have significant impact on both domestic and global markets, Sarah said during her presentation.
China's energy and coal market is a policy-driven market, and the related market supply-demand, import-export and prices are all greatly affected by the policy, she said, while elaborating on key policies including the energy policy, supply-side reform, safety and environmental protection, and import regulations.
China has been working to restructure energy structure, controlling energy consumption and consumption intensity, and building a clean energy industry system, aiming to reduce coal to less than 58% and increase non-fossil energy to 15% of its energy mix by 2020.
Such targets are expected to be achieved as planned, according to Sarah, as the share of coal has been declining in China over the years and clean energy is increasing obviously. In 2018, the share of coal, natural gas and clean energy was 59%, 8% and 14%, respectively.
While the share of coal-fired capacity decreased to 53% in 2018 from 68% in 2010 and that of clean energy capacity rose to 40% from 27%, the share of coal-fired power generation dropped to 64% in 2018 from 76% in 2010, and clean energy share up to 30% from 19%, she pointed out.
"China is upgrading its power sector; all coal-fired power plants shall complete ultra-low emission transformation by 2020," she noted. Ultra-low emission transformation is also ongoing in China's iron and steel industry.
According to 2015 Paris Agreement, by 2030, China's CO2 emission per unit of GDP will be 60-65% lower than that of 2005, and the proportion of non-fossil energy consumption will increase to 20%.
Meanwhile, massive supply-side reform in the country's coal industry, started from early 2016, has basically completed, Sarah said.
During 2016-18, 700 million tonnes per annum (Mtpa) of outdated coal capacity was eliminated in China, and another 140 Mtpa capacity is expected to close in 2019 and 2020, outpacing the 800 Mtpa target for 2016-2020, showed Fenwei estimates based on its coal mines database.
Now, the focus of supply-side reform is shifting to "build and release high-quality capacity", contributing to rapid recovery in coal production, according to Sarah.
This year, the Chinese government accelerated approval of new coal mine construction projects. Around 73% of the new capacity is thermal coal, and 90% of the new capacity comes from northern and western China - Inner Mongolia, Shanxi, Shaanxi, and Xinjiang, according to Sarah.
"Along with the increase of effective capacity, coal output is recovering rapidly," she said. "Yet, coal production has been affected by safety inspections to a certain extent, as illegal and noncompliant operations still exist."
On the demand side, coal consumption of downstream sectors has been negatively affected by the government's battle against air pollution, she noted.
Pollution control is one of the top three tasks of the Chinese government, with a three-year blue sky action plan as the most important guidance. The main measures include capping coal consumption in key areas, reducing scattered coal consumption, coal trucking restriction and off-peak production in energy-intensive industries during heating season.
By 2020, total coal consumption in Beijing-Tianjin-Hebei and surrounding areas will decrease by 10% from 2015, down 5% in Yangtze River Delta, and negative growth in Fenwei Plain including Henan and parts of Shanxi and Shaanxi, two of China's biggest coal-producing provinces.
Moreover, newly-added capacity in energy-guzzling and resource-intensive industries is not allowed unless for capacity replacement – new and high-quality capacities to supplant backward ones at no increase of capacity.
For the import market, import regulations have always played a major role in affecting China's domestic and also global coal market. The Chinese government often uses multiple tools to control imports, such as tariff, quality requirement, import quota, as well as clearance control, Sarah said.
China's coal import experienced the policy change from discouraging to encouraging, followed by tightening again. Coal import was discouraged before 2005 through import tariffs (6% for thermal coal and 3% for coking coal and anthracite), then was encouraged from 2005 by cutting import tariffs. Import tariffs were restored in 2014, 5-6% for thermal coal, 3% for coking coal and anthracite.
China has shifted to a net coal importer from coal exporter since 2009, and its coal import demand remains strong, with imports continuing rising this year despite various restrictions, Sarah stated.
Chinese customs data showed China imported 251 million tonnes of coal in the first nine months this year, a 9.5% increase from the same period last year.
The rising import volumes rendered China's import flat target for 2019 unlikely to achieve, said Sarah. "We expect the full year imports would exceed 300 million tonnes, possibly to 320 million tonnes."
China plays a decisive role in the change of seaborne market prices. This is determined by the fact that China is a marginal buyer and Chinese buyers are highly price sensitive, constantly comparing the price gap between seaborne and domestic coal.
According to Sarah, the price pattern between China and seaborne market is more typical in coking coal. The CFR price of seaborne hard coking coal usually fluctuates around China's domestic market price, between the VAT-excluded and VAT-included prices of similar quality domestic coal at Jingtang Port.
Regulations of the world's top coal importer bring great volatility to the seaborne market. Its policy changes directly impact coal import demand, and swing of import would lead to big change of seaborne demand in the short time, significantly affecting seaborne market prices, Sarah said.
Import restrictions will be in place for a relative long time, and flexibly adjusted based on domestic coal supply and demand situation, with the main purpose to ensure import volumes at a reasonable level, to fill the domestic supply gap but not to compress domestic supply seriously, she added.
(Writing by Jessie Jia Editing by Harry Huo)
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