China may be planning to improve the quality of coal it is burning, but it's unlikely any changes will have much effect on the level of imports for the foreseeable future.
China's National Energy Administration is considering a rule to ban imports of coal with a calorific value below 4,500 kcal/kg net as received (NAR), ash of less than 25 percent and sulphur below 1 percent. The reason for this is that low-rank coal is more polluting, as one needs to burn larger amounts to generate the same energy.
On the surface, the measure in the world's top-ranked importers may seem bearish for the seaborne coal market, but in reality the impact may be muted, even assuming it takes effect.
The proposed Chinese regulation would seem to mainly target Indonesian coal, with Jakarta-based stock broker Mandiri Sekuritas estimating about a fifth of the nation's low-rank exports would have to be diverted to other markets.
However, Morgan Stanley pointed out in a research note Tuesday that the Indonesian coal typically exported to China already exceeds the standard, so even if the measure is implemented, the impact will be minimal.
China's coal imports seem to be driven much more by price factors, especially in the current environment of slowing growth rates in electricity generation.
Power output did gain an annual 6.2 percent in April, picking up the pace from March, which posted the weakest growth in six months. However, slower economic growth of around 7.5 percent in 2013 will limit power consumption, which only rose 4.3 percent in the first quarter.
In this light, it may be a surprise that China's coal imports are still growing strongly, with April's 23.49 million tons up nearly 19 percent on the year, and taking the year-to-date gains to 25 percent.
China's coal imports could hit 300 million to 350 million tons in 2013, exceeding 2012's record of 230 million tons, according to Phil Ren, president of the China Coal Importers Association.
Notwithstanding the strength in imports, this forecast seems too optimistic, as it would require imports to average about 26.5 million tons for the May to December period, up from 21.8 million for the first four months of 2013.
It would also require imported coal prices to stay attractive compared to domestic output, and this may not be the case. Benchmark Australian prices at Newcastle Port rose 0.5 percent to $88.03 a ton last week, while Chinese prices fell to 612 yuan ($99.83) a ton from 613 yuan.
While the tentative move to boost coal quality may not have much immediate market impact, its importance lies in whether it is the first of many steps.
Given global and domestic concerns about pollution in China, it seems likely that authorities will seek to get more out of the coal the country use.
Source: Shangai Metal exchange market