Thermal coal exports are under threat — but there’s more to the story than just China’s politics
“Thermal coal on China’s blacklist,” screamed one newspaper front page last week, reporting that Australian coal exporters faced tougher restrictions selling into China as state-owned power plants were directed to buy domestic coal instead.
Media reports tied this development into the threats issued by Beijing to ramp up boycotts of Australian products following the punitive tariffs put on our barley and the banning of four of our largest meat packing export companies.
However, ANZ Bank’s commodity team see it another way.
“Some sources have suggested the move is a worsening of Australia-China relations,” commodity analysts Daniel Hynes and Soni Kumari wrote.
“However, we see this is a normal move by China to support its own domestic industry,” they added.
In 2018, Australia was the biggest thermal coal supplier to China, providing 35.4% of its imports, followed by Indonesia (31.3%), Mongolia (15.9%) and Russia (11.7%).
ANZ sees the imposition of import restrictions as part of the efforts by the National Development and Reform Commission (NDRC) — the agency responsible for macroeconomic management of China’s economy — to stabilise coal prices in China.
Two years ago, the NDRC announced plans to cut back coal prices through measures such as reducing excessive coal use (and, therefore, consumption) in key regions and to combat price gouging and speculation in coal.
This is not to say that Australian coal exports will not be hurt by China stepping up its economic coercion of this country, but there are several other factors to be concerned about so far as thermal coal exports to Asia are concerned.
The COVID-19 lockdowns have hurt thermal coal badly already by reducing import demand; Russia is trying to win a greater share of the North Asia market; and gas is getting cheaper – although investing in liquefied natural gas (LNG) is not.
On the positive side, the quality of Australian thermal coal is seen as a major plus.
Thermal coal hit by COVID-19
Earlier this month, the International Energy Agency predicted the effects of the COVID-19 virus would see thermal coal demand decline worldwide by 8%, the biggest drop since the Second World War.
Seaborne thermal coal prices this year have also fallen by about 20%, again due to declining demand as factories and offices stayed closed, meaning a substantial reduction in power demand.
The Commonwealth Bank of Australia (CBA) has lowered its thermal coal price forecast by 15%, to US$65 (A$99) per tonne.
Australia has previously faced new competitors in the fight for market share in Asia. Fifteen years ago, it was the emergence of Indonesia with multiple mine developments in Kalimantan.
Now, Russia is seeking to get a greater share of the markets in northern Asia, primarily Taiwan, Japan and South Korea.
Meanwhile, the post-COVID period looks challenging, although some increases in demand are expected to be seen.
CBA said all major thermal coal importers appear to be on the way to re-opening their economies. The bank’s main concern is India, which still has to flatten the rate of virus infection.
“India is most at risk of delaying a return to normal activity,” the bank’s latest note said.
Meanwhile, ANZ stated India implementing a lockdown in late March resulted in power generation in that country dropping by between 25% and 35%. At the same time, Coal India stepped up production of thermal coal, further reducing the demand for imports.
Japan’s state of emergency has added to weakened seaborne demand.
Australia’s competitive advantage
First, China may be the most important market — but by no means the only one.
Whitehaven Coal (ASX: WHC), Australia’s second largest listed pure coal player, has a substantial market for its thermal coal in Asia, but China is well down the list of its customers.
Some 56% of Whitehaven’s thermal coal output goes to Japan, 17% to South Korea, 11% to Taiwan, followed by Malaysia and the Philippines.
Australian thermal coal producers are well down the cost curve — plus, they can produce the high-quality coals needed by new generation thermal electricity plants in Asia.
The longer-term picture for our exports into Asia does include an upside.
As Whitehaven pointed out in its most recent half-year presentation, higher energy, low impurity coals are strongly aligned to environmental reforms.
And, Asia is in need of electricity supply to support a growing urban population and increased standard of living.
Furthermore, Asian nations are commissioning new ‘high efficiency, low emissions’ (HELE) coal-fired power stations.
Japan has 15 coal-fired power stations under construction with a total generating capacity of 8,670 megawatts.
Moreover, many thermal coal plants in Asia are less than 15 years old and so have long lives remaining — and aren’t expected to be blown up like has happened in South Australia and Victoria. (One online news site carried a picture of the chimneys at the Hazelwood station being blown up this week under the headline, “Hope they’ve got enough solar panels!”.)
Thermal coal producer New Hope Group (ASX: NHC) has argued that Australian thermal coals are well suited to the latest generation of ‘supercritical’ and ‘ultra supercritical’ power stations in Asia.
Supercritical steam plant technology is today the option of choice for most new coal-fired power stations, offering greater efficiency and lower emissions than older ones, now known as sub-critical stations.
Better coal needed as LNG involves huge capital outlays
New Hope said competitive cost of generation is the key reason Asian countries keep coal-fired power in their energy mix.
By contrast, for many of the countries a switch to LNG involves building complicated infrastructure for unloading and reprocessing, long lead times and huge capital costs.
Meanwhile, Asian customers are demanding higher quality coal.
Japan has been the leader in demand for good quality coal to avoid the cost of ash disposal, but now Taiwan is seeking lower ash coals to reduce air pollution, while South Korea is asking for reductions in sulphur content.
This, according to New Hope, is all positive news for Australian coal.