BMI View: China's thermal coal imports are set to increase over the coming quarters as the government adopts a more hands-off approach to regulating the market. Despite the ongoing clean energy push, we believe thermal coal will continue to dominate the majority of China's overall energy mix in the years ahead.
As part of an ongoing effort to liberalise the Chinese coal market, the National Development and Reform Commission (NDRC) has put forward a plan to scrap an annual coal contract system between sellers and utility companies starting from 2013. We believe the implementation of the new plan could precipitate a jump in China's coal imports as domestic prices will no longer be kept artificially low. Under the current system, coal suppliers are mandated to sell certain quantities to power companies at prices far below market rates. According to official reports, power companies have managed to secure around half of their annual coal consumption at preferential prices. The Chinese government had imposed a price ceiling of CNY800/tonne (US$130/tonne) on spot coal prices in 2011 while contract prices for 2012 were fixed at approximately CNY599/tonne (US$96/tonne).
|Heading For Higher Levels|
|China - Thermal Coal Imports ('000 tonnes) & Growth|
We expect the scrapping of the coal price cap will open the Chinese coal market to free market forces and allow greater competition between domestic suppliers and their c ounterparts in other countries. Although coal imports from overseas markets will prevent local buyers from becoming hostage to higher domestic prices from inefficient Chinese mines , they will nevertheless become increasingly vulnerable to fluctuations in gl obal coal prices. That said, our expectation for Newcastle steam coal to continue trading in the US$70-100/tonne range will ensure that the price risks for power companies are relatively muted . We believe declines in prices will be stamped by rising imports from China, while ample supply from the US will continue to keep prices in check and prevent significant gains from taking place.
|Finding A Base|
|Spot Newcastle Steam Coal, 6700kc GAD fob (US$/tonne)|
Despite being the world's largest thermal coal producer, at 50% of global output, we believe China will remain dependent on coal imports for power generation needs. Coal has been the cheap energy source for generating electricity globally and has helped to power the rise of manufacturing hubs in Asia and much of the emerging economies. We expect China to remain the key demand driver for global coal in the coming years. According to the International Energy Agency (IEA), the increase in China's coal production accounted for approximately 75% of global output growth in 2011, but this was insufficient to meet the country ' s needs, with China surpassing Japan to become the world's largest coal importer.
Although China will continue to source the majority of its coal from countries such as Australia and Indonesia, we expect the US to become an increasingly important player in the global seaborne market, as lower natural gas prices brought about by the shale gas revolution allow domestic natural gas-fired generators to compete with coal-fired generators, freeing up resources for exports.
|China's Import Reliance To Persist|
|Global - Thermal Coal Imports By Country (2011e)|
Growing Focus On Low-Carbon Alternatives, But Coal To Remain King
China's 12th Five-Year Plan (2011-2015) and its new energy white paper, the so-called 'China's Energy Policy 2012' published last October, put a strong emphasis on the development of a low-carbon, clean and efficient energy mix, as well as on the significance of energy conservation, endeavouring to boost the country's so-far limited green credentials and increase the shares of non-fossil fuels in primary energy consumption and installed generating capacity to 11% and 30% respectively by 2015.
These commitments, supported by a significant pipeline and capital expenditures, suggest that the renewable and gas segments will see sustained growth over the coming years. The government is very supportive of renewable energy and has implemented ambitious renewable energy and emissions targets under its 12th Five-Year plan, with plans to build almost 10 times the wind capacity of Germany and sustain its renewable equipment manufacturers. A plan to introduce regulations requiring electricity distributors to source between 5-15% of electricity sold (depending on location) from renewable sources was announced in September 2012. Earlier in the year, the government had also scaled up solar energy capacity targets for a second time, after raising them for a first time at end-2011.
|China - Gas Production & Consumption (bcm)|
Additionally, China has been promoting gas consumption as it steps up on its switch to cleaner fuels for its energy needs. It expects gas to rise from 4.4% of its total energy mix in 2010 to about 10% by 2020. As highlighted by BMI's Oil & Gas analysts, in order to meet its targets, the Chinese government is seeking to promote natural gas consumption across the economy, particularly in the transport sector. In line with this picture, the country has been actively building up its infrastructure for gas transportation - both in liquefied natural gas (LNG) receiving capacity and domestic gas pipeline networks - in preparation for an expected increase in domestic gas use. Moreover, China is intensifying its efforts in conventional gas production both onshore and offshore, as well as actively promoting the development and utilization of unconventional ones such as in shale gas and coalbed methane (CBM) - with all international players with the relevant expertise having already expressed strong interest in the country's emerging shale plays.
|… But Coal To Retain Primacy|
|China - Total Power Generation, By Type (TWh)|
This notwithstanding, we believe that thermal coal will continue to dominate China's overall energy mix for the next decade, with coal imports continuing to hold up well over the period. In comparison to oil and gas, coal is generally easier and cheaper to mine, as well as easier to transport using existing infrastructure such as roads and rails. In addition, the sheer magnitude of the existing coal-fired power infrastructure gives the fuel an edge over other alternatives in the short-to-medium term. Hence, whilst BMI's Power analysts expect the share of coal in China's overall energy mix to decrease from 78% in 2011 to 71% in 2021, the fuel will retain its primacy. From this perspective, it is of interest to note that China's heavy reliance on coal for electrification needs has prompted the government to undertake further exploration plans in the west and centre of the country, both relatively untapped areas. The government is currently looking for companies to invest in the Ningxia province which is estimated to contain 2.7bnt (billion tonnes) of reserves.
|Exploration Efforts To Drive Production|
|China - Coal Production & Growth|