China’s government has recently announced two sets of measures to restrict imports of coal: the first seeks to limit the use of dirty coal and the second re-imposes tariffs on imported coal.
On 15th September 2014, China’s National Development and Reform Commission issued its “Interim Measures for Quality Management of Commercial Coal” (NDRC Decree No. 16) which comes into effect on 1st January 2015. The key components of this document are:
- A ban on the production, sale, transport and import of coals which exceed the following limits:
- 30% ash and 1.5% sulphur in the case of lignite;
- 40% ash and 3% sulphur for all other coals.
- A ban on the transport over distances greater than 600 km within China of coals which lie outside the following limits:
- Minimum of 3,941 kcal/kg, and maximum of 20% ash and 1.0% sulphur in the case of lignite;
- Minimum of 4,300 kcal/kg, and maximum of 30% ash and 2% sulphur for all other coals.
- A ban on the use of coal in Beijing, Tianjin, Hebei, and the Yangtze and Pearl River delta areas of coal with an ash content greater than16% and a sulphur content exceeding 1%. In addition the use of unprocessed coal in these regions will be “limited”.
These measures are intended support of the wider effort to reduce air pollution which was embodied in the “Action Plan for the Prevention and Control of Pollution” issued by the State Council in September 2013. This document sets down a number of quantitative targets relating to particulate matter to be achieved by 2017 and a range of measures to help achieve these targets. Three areas have particularly tough targets: the Beijing-Tianjin-Hebei region, Yangtze River Delta region around Shanghai, and in the Pearl River Mouth Delta region in Guangdong.
The domestic implications of these new measures are rendered slightly unpredictable by their “Interim” nature and by ambiguity of certain phrases. In the short-term, two ambiguities stand out. The first is the declaration that the standards of sulphur content could be relaxed for commercial coal used by power stations and that such ‘relaxation’ would be regulated by relevant coal management departments. The second ambiguity relates to the use of unprocessed coal in the eastern regions, such coal being used mainly by households, restaurants and small boilers. In both cases, it will be local governments which will decide how to enforce the measures. Together, these ambiguities have the potential to limit the beneficial impacts on local air pollution.
If properly enforced, these measures should reduce the production and use of low quality and unwashed coal in China, in part by squeezing out small-scale miners and middle men in favour of the large state-owned mines. This then leads to the question of whether China’s coal consumption is reaching a peak. Some commentators have seized on recent trends to suggest that national coal consumption may peak in 2016. Annual growth rates of coal consumption declined sharply from 7-10% in the period 2009-2011, when an economic stimulus plan was being implemented, to just 2-3% since 2012. Domestic coal production in the first six months of 2014 fell by 1.8% compared to the previous year to 1.816 billion tonnes, and imports for the first 8 months fell by 5.3% to 200 million tonnes. Electricity consumption in 2014 is up only 4% on an annualised basis, much lower than the projected GDP rise of 7.5%. If all these statistics are accurate, they indicate that China’s economy is indeed switching away from energy-intensive industries and that even these industries are becoming more efficient. Within the power sector, the sustained expansion of hydro, nuclear and wind power coupled with the improving efficiency of thermal power stations is steadily constraining the requirement for thermal coal.
The government is certainly trying to constrain the domestic production of coal by setting a limit of 3.9-4.0 billion tonnes per year, and it continues its efforts to close small-scale coal mines. But at the same time the industry is building new mine capacity, especially in the north-west of the country in Inner Mongolia and Shaanxi. On the demand side, continuing urbanisation remains a central feature of national strategy, with another 100 million people due to move to the cities by 2020. This will support the continued production of energy-intensive products such as steel, cement and plate glass, as will the recent reduction in interest rates for mortgages.
It has been suggested that the aim of these Interim Measures is to reduce the quantity of coal imports and thus protect Chinese state-owned mines at a time of over-supply. There has been considerable debate on the likely consequences of the quality standards on those countries and companies which export coal to China. A significant proportion of Australian and South African thermal coal shipped to China does exceed these new limits, although it has high energy content, but this problem could be addressed by reducing the quantity of higher quality coal sent to other countries and sending more to China. In addition, the mining companies could increase the share of coal that is washed, though this would increase costs. In the case of Australia, a large share of its coal supplies to China takes the form of coking coal. Conversely, Indonesian coal has low energy content, but also a low content of sulphur and ash. As a result these new measures will not constrain the import of coal from Indonesia but do limit its transportation to less than 600 km from the port. However, if Chinese power companies choose to buy low energy rather than high energy coal as a result of the Interim Measures, the quantity of pollution will rise as more coal will be consumed.
The government’s intentions concerning the import of coal became clear in early October when it re-imposed tariffs on coal imports at 3% for coking coal and 6% for other coals, the same levels at which they stood before being scrapped in 2007 and 2005 respectively. These tariffs took effect from 15 October and will have an immediate impact on coal miners in Australia and Russia. Indonesian miners are protected by a free-trade agreement, but Australia and China have not yet concluded their trade agreement after nine years of negotiation.
The re-imposition of tariffs makes it quite clear that the main aim of the government is to protect domestic coal miners. Large new coal mines are opening in the far north and west of the country at the same time as existing mines are losing money and receiving subsidies from local governments. The intention is to reduce the price competitiveness of imported coals and protect coal mining enterprises and jobs in China at a time of global and national oversupply.