Several Australian thermal coal suppliers are likely to be hit by the Chinese government's move to restrict use of high ash and sulfur material from 2015, analysts said Tuesday, September 16.
"While there are significant uncertainties regarding the guidelines, they have the potential to impact 105 million mt of imported thermal coal demand," Wood Mackenzie said in a note.
"While we expect the impact of the guidelines to be positive for imported thermal coal demand overall, high ash exports such as those from Australia would be negatively impacted," Wood Mackenzie said.
In a bid to fight pollution, China's National Development and Reform Commission announced measures to restrict the quality of coal to be used in the country effective January 1, 2015.
The measures include restrictions on sale and use of coal with ash above 16% and sulfur above 1% in the Beijing-Tianjin-Tangshan metropolitan and neighboring areas, the Yangtze River Delta and the Pearl River Delta.
These regions represent about 30% of Chinese thermal-fired power generation and 42% of thermal coal imports, Citi analyst Ivan Szpakowski said.
Confusion prevails, however, on the word "sanmei," which means scattered coal, used in the NDRC directive.
Sources said that the restrictions on coal use in these regions likely applies only to small end-users such as hotels or residential homes rather than power plants.
In a note on Wednesday, the Minerals Council of Australia said: "The MCA is advised that these regulations [related to Beijing, Tianjin and other cities] refer to what is colloquially known as "San Coal" -- coal used for small boilers, domestic heating, hotels or restaurants, not power plants or other industrial users.
"This is to address smog concerns within these cities," MCA said. "We are not aware that Australian coal is supplied in these markets."
Wood Mackenzie said that Indonesian coal might generally not be impacted by the Chinese regulations due its mostly lower ash and sulfur content.
Chinese domestic supply might, however, feel the impact of these regulations, analysts added.
"Chinese domestic supply is likely to feel a greater impact than imported coal," Szpakowski of Citi said.
POTENTIAL IMPACT
"Some producers from both Australia and South Africa that sell high-ash coal are more at risk," UBS analyst Daniel Morgan said in a research note.
Wood Mackenzie said Australian high-ash coal suppliers such as Glencore, BHP Billiton and Rio Tinto, are likely to be hit the hardest by these regulations.
Taking 160 million mt, or roughly about 80% of the expected total thermal coal exports from Australia as an example, as much as 45%, or about 72 million mt, appears to either not or only partly comply with the strictest quality regulations issued by the NDRC, Lachlan Shaw of Commonwealth Bank said in a note.
Australia exported 47.5 million mt of thermal coal to China, or 24.4% of the total thermal coal exports of 194.4 million mt in the year to June 2014, Shaw noted.
Stringent restrictions on thermal coal consumed in key areas, including Beijing, Tianjin, Hebei, Shanghai, Jiangsu, Zhejiang and Guangdong, would have an impact on seaborne coal as these regions account for roughly half of China's annual imports, or about 100 million mt, ANZ Research analyst Ankit Pahuja said in a separate note.
Australia supplied about 60 million/year to China and expects about 30 million to be potentially impacted by these regulations, he added.
"Any non-compliant coal currently sold to China could be redirected to other markets if those markets have the capacity to absorb lower quality coal," Shaw said.
Chinese demand for lower quality coal should reduce with these regulations in place, but may not necessarily translate to higher demand for better quality material, he added.
"Ultimately we believe China is trying to slow or reduce coal consumption and that cannot be positive for overall seaborne trade or pricing over the medium term," Shaw said.
