—Clyde Russell is a Reuters columnist. The views expressed are his own.—
By Clyde Russell
LAUNCESTON, Australia, Sept 11 (Reuters) - When the best thing you can say about new policies is that they aren’t as bad as they could have been, then you know your industry is in deep trouble.
China’s proposed cap on coal consumption and ban on low-quality imports won’t have sparked celebrations among export-focused coal miners, but may have given them some hope that the world’s top importer of the fuel will remain open for business.
The State Council, China’s cabinet, on Tuesday published a draft version of a law to tighten air pollution control by cutting the use of coal, which is used to generate about 80 percent of the nation’s electricity.
The draft didn’t spell out exactly what the consumption cap would be, nor the quality standards that would be imposed on imported fuel.
However, industry sources say the recommendation from the National Energy Administration is that coal with a sulphur content of more than 0.6 percent and ash content of more than 15 percent be banned.
What is also interesting to note is that the proposed import ban doesn’t specify heating value, meaning low-calorific coal could still be shipped in as long as it has low ash and sulphur.
At face value, this appears to favour Indonesian producers, whose low-calorific coal meets the ash and sulphur standards, while penalising exports from Australia and South Africa.
However, Morgan Stanley analysts, in a Sept. 4 report, said about 39 percent of Australian output may be excluded if the proposal becomes law.
While this sounds significant, the report points out that only a small proportion of that 39 percent of output goes to China currently, and there is still plenty of supply from the remaining 61 percent that could meet any shortfall.
It’s also likely that Australian and South African producers will waste little time in trying to convince Beijing that banning high calorific coal while still allowing low calorific shipments makes little sense from a pollution perspective.
More important for exporters to China will be the overall cap on consumption, which the current five-year plans pegged at 4.1 billion tonnes by next year.
Assuming this level becomes a permanent cap, the main issue is what action Beijing will take to limit domestic production, which stood at 3.7 billion tonnes in 2013, and is likely to be around this level in 2014 as well.
If Chinese domestic output is kept around current levels, or increases slightly, it will still mean plenty of opportunities for imports. However, if the domestic industry is allowed to mine over 4 billion tonnes a year, it’s likely that imports will be squeezed even harder than they are by the current low pricing.
The best case scenario for coal exporters is that the new regulations make some Chinese domestic mines unviable, thereby limiting domestic production.
The other issue facing coal miners currently is the by now customary state of uncertainty in India.
The Indian Supreme Court this week reserved judgment to an unspecified later date as to whether it would cancel the award of more than 200 coal blocks it had previously ruled illegal.
The net effect of this ruling is to delay, once again, efforts to reform the nation’s beleaguered coal sector.
What is becoming clear is that the new government of Prime Minister Narendra Modi is not moving as fast as many had hoped to resolve the coal crisis.
In addition to questions over the ownership of blocks that supply private power generators and factories, state behemoth Coal India is again under the gun for failing to provide sufficient supplies to many power plants.
Coal stocks at power plants, which produce about 60 percent of the nation’s power, have fallen to six days’ forward cover - down nearly half since Modi’s national election victory in May.
India is facing several challenges on the coal front, including uncertainty over private mine ownership, an inability to mine and transport sufficient supplies, large losses at generators forced to sell at regulated prices that are below costs and a lack of money to pay for imported fuel.
India, the second-ranked importer of coal, should, in theory, be turning to imports while it sorts out its domestic issues.
But the fact remains that loss-making generators will be reluctant, or unable, to buy imported fuel.
Perhaps it needs a repeat of a crisis on the scale of the 2012 blackout that cut power to more than half a billion people to spur Modi into action, but, for now, coal exporters can’t count on higher Indian demand. (Editing by Joseph Radford)