China’s coal ban to disrupt Australia’s coal exports

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Image credit: Flickr User: Desiree Kane

China’s decision to ban coal-burning power stations in Beijing and other major cities by 2020 will barely do anything to lower the country’s coal consumption and the shocking levels of air pollution; however, it will add to the woes of the struggling Australian coal industry.

China’s coal ban to disrupt Australia’s coal exports
Image credit: Flickr User: Desiree Kane

According to the article on ABC, the four power plants that will close in the Chinese capital generate three gigawatts of energy — barely 0.5% of China’s annual needs.

“Put another way, they add three gigawatts a week to the thermal power demand,” said Mark Pervan, Head of Commodity Research at ANZ.

“So shutting down the thermal power capacity in Beijing would be replaced within one week in China.”

The ban spells trouble for the Australian coal industry, with prices for both thermal coal — used for electricity — and cooking coal — an ingredient in steel production — down about a third and a quarter, respectively, of what they were in 2008.

Analysts say the two biggest problems facing the coal industry have been the over-supply and the push towards clean energy.

“We’ve had quite a bit of supply come on from the higher price period before,” said Matthew Hodge, Senior Resources Analyst at Morningstar.

“That’s meeting weakish demand, and it’s overwhelmed demand so now we’ve got over-supply. As a consequence, no-one in the industry’s really making any money in Australia.”

Mr Pervan says supply has so far been unresponsive in Australia, because much of the industry is controlled by big companies with deep pockets, who are prepared to ride out the downturn.

“I think the rub there is that the Australian coal industry is at the top end of the cost curve, so it’s these guys who should be making some serious decisions about closing supply,” he said.

Analysts also warn that falling cost of solar power could also potentially disrupt the coal industry because it can generate power during the most profitable peak hours, undermining the viability of thermal coal in the long run.

While preliminary estimates suggest that Australia is expected to increase its exports of thermal and coking coal  by 2% in 2015, the Bureau of Resources and Energy Economics is forecasting the value of sales to fall by 8.4% because of lower prices.

However, Paul Bloxham, Chief Economist at HSBC, says it’s not all gloom and doom for Australia’s energy sector, as the country has another ace up its sleeve.

“It is worth keeping in mind that one of the substitutes for coal is liquefied natural gas, and of course Australia is yet to see that big boost to the economy from production of LNG,” he said.