China’s recent move to limit imports of the dirtiest coal from 2015 onwards is a scary prospect for Australian miners.
The proposed restrictions will ban the burning of coal with high levels of ash or sulphur in areas around major cities, as the Beijing government battles its pollution crisis. Analysts say that as much as half of the thermal coal currently shipped from Australia to China could fall foul of the new measures.
The exact effects on Australia’s coal export market are hard to predict, and will doubtless vary between different companies and coalmining regions. But what is clear is that unless it can find some new customers, the sector is likely to find itself in trouble.
Industry groups have claimed that coal mining contributes some A$60 billion a year to Australia’s economy – roughly the same as the iron ore and agricultural sectors – while supplying A$3 billion in total annual royalties to the Queensland, New South Wales and Victorian state governments.
Like other resource exports, Australia’s thermal coal sales – worth A$16 billion worldwide according to the Bureau of Resource and Energy Economics – are at the mercy of the world market.
The Australian coal industry is already reeling after two years dogged by job losses, increased costs and rapidly eroding profitability. Nearly 10,000 coal workers lost their jobs in 2013, and more lay-offs are expected in the future.
With coal prices already falling, Australian exporters could also face the extra prospect of having to “wash” their product to bring ash and sulphur within China’s new guidelines – which will add costs and damage profit margins. The potential extra cost has been estimated at anywhere between A$1 and A$27 per tonne.
Since 2004 there has been a continuous slowdown in mining sector profitbility, mainly because labour and capital costs have been consistently above the global average.
Yet despite these financial productivity issues, and the growing worldwide expectation that coal mining and coal-fired power generation should meet higher environmental standards, the Australian coal sector is focusing on increasing its production. Recently, despite contention about the environmental impacts, federal environment minister Greg Hunt and the Queensland government approved the Carmichael coalmine in the Galilee Basin.
One of the largest coal projects in the world, the new mine will cover 200 square km and add up to 60 million tonnes annually to Australia’s existing coal production. In an increasingly competitive market, Australia will need to find more buyers for its new coal supplies.
New customers needed
Indonesia already competes with Australia to export to China, and it is anticipated that the United States will increase its coal exports from the Powder River Basin in Wyoming and Montana over the next few years. Meanwhile, other emerging producers including Mongolia and Mozambique are expected to create significant competitive pressure in the world’s coal export market.
At the same time, many Asian economies are increasing their electricity generation capacity – some of it through renewable energy, but significant amounts through fossil fuels – which may open new avenues for Australian coal exports.
China has recently shown interest in investing in coal-fired power plants in Pakistan, and Pakistani power minister Khawaja Muhammad Asif said earlier this month that one of the sources of coal could be Australia.
What will China’s new rules mean?
It is not yet clear how much Australia’s coal industry stands to lose from China’s new rules. The costs of processing it to the required standard are not clear, particularly because much of Australia’s coal is well above the Chinese requirements anyway.
But the move nevertheless represents another new problem for a sector that is facing many other challenges, including deterioration in terms of trade (the ratio of export prices to import prices), low coal prices, exchange rate appreciation, declining productivity, and the emergence of overseas rivals with lower production costs.
That is why Australia’s coal sector is now focusing on ramping up production, to try and gain a competitive advantage over emerging Asian and African miners and capture a greater market share for sustained export earnings.
The climate challenge
The other major challenge facing Australian coal, highlighted by this week’s UN Climate Summit in New York, is fact that much of the world is aiming to wean itself off coal.
China’s thermal coal use is forecast to peak in just two years, and UN climate chief Christiana Figueres has advocated the replacement of fossil fuels with alternative energy sources.
China’s investment in up to 200 gigawatts of wind energy is just one sign that it is aiming to reduce its dependence on coal. There is a growing sense that China is getting serious about cutting its greenhouse emissions.
China’s new coal regulations are a warning to Australian miners that they won’t survive either without exploring other export markets besides their traditional customers, China and Japan.
And if Australia wants to remain an energy exporter far into the future, it should focus on exploiting its admirable technological abilities to develop renewable energy products that could diversify its exports still further.
This article was first published by The Conversation