“The current ban, proposed by the China National Coal Association and being scrutinised by the National Development and Reform Commission, would prohibit all coal imports above 15% ash and 0.6% sulphur (and it appears there is no accompanying calorific value restriction),” MPW said in a report on thermal coal uncertainty.
“In short, imposition of this sort of ban would be extremely damaging to the seaborne market.
“The greatest impact would undoubtedly be on the Australian coal industry. The current run-rate of Australia to China thermal coal trade is at least 49 million tonnes per annum.”
The broker estimated that the implementation of the draft ban would put at risk at least 40Mtpa and estimated that 48% of all exportable Australian thermal coal did not meet the proposed ash and sulphur threshold.
“Based on Wood Mackenzie data, almost half of all Australian exportable thermal coal would not meet a 15% ash and 0.6% sulphur cut-off. More significantly, we estimate that almost all of the thermal coal Australia ships to China does not fit the cut-off.”
The broker also reached out for some industry feedback on whether the banned coal could be blended or washed enough to meet the proposed threshold.
“Our industry contacts are indicating that even if the capacity for beneficiation is available, it would generally be uneconomic to do so (given low yields),” MPW said.
“Blending with 6,000 kilocalories per kilogram specification Newcastle coal is the more likely option, resulting in a ‘Korean-grade’ product (which may or may not meet the standard 6,000kcal/kg index minimum of 5,700kcal/kg).
“However even if all of this material is blended, it is hard to see where it would end up. The demand-growth engines of India and Korea we think will only increase imports by 15-20mt/year combined over the next 3 years, and there is little demand-growth elsewhere.”
Despite the concern, MPW is sceptical the proposed ban will be implemented.
“Import bans have been actively discussed for the past 18 months at least and yet implementation has proved more elusive,” MPW said. “This draft ban is by far the most onerous.”
The broker also notes that protection of China’s domestic coal industry was counter to the Chinese government’s plans to make its state-owned enterprises more efficient.
MPW also viewed that: “A goal of reducing pollution cannot effectively be achieved without 1) a kcal restriction being added to the import ban (since we care about emissions per unit energy) and 2) imposing nation-wide restrictions on domestic coal consumption.
“Some cities have already prohibited coal-burn of lower quality coals, but these are not the major power-generation areas.”
There is also the prospect that less harsh measures could be adopted in China with a potential coal import tax also reportedly considered.
“The market is currently understandably nervous regarding potential Chinese policy action,” MPW summarised.
“Our conversations with international producers and traders reveal as much. Given a continued lack of clarity, market participants are looking at what the worst case scenario might mean, even if they don’t think this worst case scenario is the most probable outcome.
We remain sceptical that a 15% ash, 0.6% sulphur coal ban will be implemented but don’t rule out the possibility that some milder form of import restriction is introduced. It remains unclear if the NDRC directive to power companies is currently leading to a reduction in imports, beyond what would have happened anyway in light of the very weak underlying China market fundamentals.”
