The National Development Reform Commission has proposed new measures to ban the burning of coal with ash content of more than 40% or sulphur content of more than 3%. However, the major change is that restrictions are significantly tighter in the major coastal cities and regions such as Beijing, Shanghai, Guangzhou and Tianjin, which is where most export coal is used – in those areas, the regulations are 16% ash and 1% sulphur content.

Tim Buckley, Director of Energy Finance Studies, Australasia, for the Institute for Energy Economics and Financial Analysis (IEEFA) has spent many years studying the economic viability of energy projects and companies, and says this latest announcement puts Australian export coal at serious risk.

“Claims made overnight by some industry lobby groups suggesting there is no impact are misleading and seem to be divorced from reality,” Mr Buckley said.

“The critical point is that the Eastern coastal areas of china are where global seaborne thermal coal imports including those from Australia compete. The western inland coal markets of China are not contestable.

“In line with comments from Macquarie, Nomura, Wood Mackenzie and IHS, IEEFA sees this proposal as potentially having a material impact on Australia’s thermal coal export sector. Macquarie has estimated that 48% of Australian thermal coal exports are potentially affected.

“This raises serious questions about the need for significant new water allocations and will require new capital expenditure by coal miners to build coal preparation and washing plants to process the coal before export.

“Coal washeries also require significant additional energy inputs. The combined impact is that coal washing adds $USD 3-5 per tonne to the cash cost of production of coal. This will however have the benefit of improving coal quality and hence reducing the tonnage of coal that needs to be transported, and reduces emissions on use in coal fired power plants.

“This proposal will particularly hit Adani and GVK’s plans to develop the Galilee, given the raw ash content from much of the Galilee thermal coal basin is generally 25-30%.

“NSW projects will also be affected, with Hunter Valley coal developments particularly impacted.

“The ability of the companies to fund the extra capital investment and then procure sufficient additional water allocations will add additional challenges to projects already facing serious financial viability questions.

“Why is China pursuing this proposal? Clearly reducing air pollution is a key driver. We would also reference the growing expectation that a peak in China’s national thermal coal consumption is imminent,” Mr Buckley said.

IEEFA forecasts a peak in China’s thermal coal consumption by as early as 2016, as will be further examined in the forthcoming Carbon Tracker Initiative / ETA / IEEFA global coal study to be released next Monday in New York.

“Australia is disadvantaged compared to low ash, low sulphur coal export countries such as Indonesia.

“Protection of China’s domestic coal mining industry is clearly a major priority, given China is not immune to the loss making state of many coal firms globally,” Mr Buckley said.

Tim Buckley is the Director of Energy Finance Studies, Australasia for the Institute for Energy Economics and Financial Analysis. He has 25 years of financial markets experience, including 17 years with Citigroup culminating in his role as Managing Director and Head of Australasian Equity Research. Mr Buckley has spent the past five years investigating trends in global renewable energy.