China’s proposed regulations introducing a ban on lower quality coal imports would have a significant impact on Indonesia’s export market, if implemented in their current form.   However, lobbying by industry groups both within and outside China appears to be working: the most recent reports indicate that China is considering softening the proposed coal import restrictions.  

Interim Regulations on Quality Management of Commercial Coal (Draft)

The full content of the draft regulations is not yet available, but in late May reports indicated that the threshold for thermal coal imports would be set at a minimum calorific value of 4,540kcal/kg, maximum sulfur content at 1 per cent and 25 per cent ash on a net-as-received basis.

This would capture roughly 55 million tones of coal imports, according to Reuters (China considers less strict coal import quality restrictions, June 4, 2013, Reuters), of which the majority is from Indonesia. Analysts (Helen Lau, UOB KayHian, as quoted in Dow Jones Chinese Financial Newswire, June 6, 2013) maintain that the ban would cut thermal coal imports to China by nearly a third.

Ostensibly, the ban is being introduced to address environmental and air quality issues in China. However, it is widely acknowledged as an attempt to protect China’s domestic coal industry. China imported around 290 million tonnes of coal last year – around 30% more than the previous year – and the ban is thought to be a reaction to the resulting lower domestic coal prices.

Winners and losers

Of China’s two biggest customers, Indonesia is likely to be the most affected, as the majority of its exports to China are below the proposed 4,540kcal/kg threshold. In recent years, thermal coal exports from Indonesia to China have grown exponentially, from around 5mtpa to the current 30 – 40mtpa (China Coal Import Ban Unlikely on Cost, Indonesian Miners say, June 5, 2013, Bloomberg).

The ban will also affect Vietnam, which exports around 10mpta of lignite grade coal, and the US which exports around 8mpta of high sulfur thermal coal.

Australia is likely to be the overall winner. With its higher grade exports (at around 5,500kcal/kg) untouched by the proposed ban, the major mining developments in the Galilee and Surat Basins would benefit greatly in the China market by the exit of their main competitor, Indonesia.

Domestic and international reactions

It would appear that the proposals are deeply unpopular with Chinese utilities and power producers, who blend inexpensive low-grade coal imports with higher-quality coal in order to keep their prices down. The five largest power groups in China have submitted a joint protest to the National Development and Republic Committee.

If the ban is implemented, Indonesia’s coal industry will need to look to new export markets. India and South Korea are likely candidates with their well-established and coal-hungry power sectors. The ban may be fortuitous for Malaysia, with its nascent coal-fuelled power sector.

Within Indonesia, the ban might result in a shift towards coal-blending facilities in an effort to circumvent the ban. This development would also play into the hands of the Indonesian Government’s attempts to develop ‘value add’ further up the supply chain, rather than focusing on exporting large quantities of raw material. Rather ironically, the Indonesian Government has been threatening to ban the export of low calorific value coal, which industry groups have undertaken to challenge if this ultimately becomes a regulation. The proposed threshold for “low calorific value” has oscillated between 5,100 – 5,700 kcal/kg. This dovetails with the concern of the Indonesian Government that too much coal is currently exported, with a Domestic Market Obligation having been introduced a couple of years ago. This also has been subject to industry criticism, at least from the larger players who have a secure chain of offshore customers.

A revised proposal?

More recently, it has been reported (China may curb coal imports, June 6, 2013, Wall Street Journal)  that the ban is being revised such that it will apply to coal with a minimum calorific value of 3,750 kcal/kg the maximum sulfur content has, apparently, been raised to 2 per cent. This reduced threshold would affect 10% rather than 20% of the Chinese coal import market (China considers less strict coal import quality restrictions, June 4, 2013, Reuters). However, there are no official reports of this revision and Chinese authorities have not commented.

While the original threshold of 4,540kcal/kg would affect the majority of Indonesian thermal coal exports, the lower threshold of 3,750kcal/kg would capture a far smaller proportion of exports. Most Indonesian exports of coal are above 3,700 kcal/kg.

Conclusion

Whether this ban will be introduced at all is uncertain: the five largest power groups in China have made a joint protest to the National Development and Republic Committee, on the grounds that their production costs will increase. The NEA is, apparently, soliciting opinions from local stakeholders and there are many who believe this ban will not be implemented.

From Indonesia’s coal industry perspective, the difference between the likely impact of the original and the revised threshold on the country’s thermal coal export market is huge. Either way, perhaps it is time for Indonesia’s coal industry to reduce its reliance on China as its primary export market and look to pursue a diversified basket of opportunities in India, South Korea, and Malaysia.- See more at: http://www.conventuslaw.com/37114#sthash.5I8ymqAD.dpuf

 

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Rumor of the china coal ban on low grade coal grade of below 4500. This means most of the original coal rights is going to be adversely affected since there will be a flood of supply of such low grade coal in the market once china officially bans them.Even if they mix them to qualify, it will be costly for the logistic and the existing mine rights would be worth much less than 35c since the DCF value of the coal sold would collapse.The forward 6mth   bleak demand picture is not helping.Good chance of collapsing way below ipo price if the Ban really takes place.