Examining China's Proposed Coal Ban
Video Transcript:
On May 15, China's National Energy Administration announced a proposed ban on imports of low-grade coal, which is less efficient and more polluting. This ban could affect approximately 65 million tons of imported coal a year coming primarily from Indonesia, and it remains a heated debate among policy-makers today. The impact of such a ban could rock coal markets internationally. Domestically, China's power companies are voicing opposition to measures that would raise their costs, pitting themselves against state and domestic coal companies slated to be the big winners of these measures.
The National Energy Administration is an institution under the powerful National Development and Reform Commission, or NDRC. There are indications that the NDRC, for its part, feels that prices of imported coal, iron and other commodities are being manipulated, hurting Chinese consumers. There are voices within the NDRC that endorse restricting imports of lower grades of coal as a measure to bring down the prices of all coal. And, of course, all of this the government is promoting internationally as a way to curb pollution. Although pollution remains high on the government's agenda, it is only a lesser factor in this overall debate.
Since the announcement last month, the plan continues to be debated with apparently very little clear-cut direction on implementation. Different versions of the ban have been floated since the original announcement, including a lower threshold for lower-grade coal imports.
We have been watching China's state-owned Shenhua Group with particular interest. Shenhua has competing interests as both a coal and power producer, and there have been conflicting reports on which way they would throw their weight. Shenhua is an incredibly powerful player and commercial heavyweight, whose lobbying efforts, one way or another, could affect the execution of a ban. The large power companies have come out against the ban publicly. However, Shenhua and Datang Power, both large power companies and coal producers, seem to be moving behind the scenes in support of a ban.
The draft coal ban has highlighted numerous fissures within policy-making circles, not only between the NDRC and large state-owned enterprises, but also among the state councilors, who feel that the NDRC should step away from its planning model and let the market determine prices. These policy-makers are pushing for more market-oriented reform, arguing that the time is right to move towards market-based pricing for resources and energy, and especially for a market-oriented link between coal and end-user electricity prices. Under the current economic slowdown, they argue, such a move will have less of an impact on inflation. These policy-makers are pushing for market-based reform to cover not only coal, but also petroleum, natural gas and even water prices by the third quarter.
Regardless of these various and disparate voices weighing in on the coal ban, a ban will not be implemented overnight and unlikely to be uniform across the sector. If the domestic supply and demand favors domestic producers, resistance to the ban will be manageable, even from the power producers. After all, power producers blend lower and higher-grade coals to achieve the best overall cost per thermal unit.
Blending coal also allows the traders to take advantage of a significant price arbitrage between the different grades of coal. Blending higher- with lower-grade coals can make more money than selling the grades unblended. Any policy that interferes with this market and further cuts into power producers' tenuous margins due to capped electricity prices would further pit this sector against the government.
At the moment, however, with the drop in domestic coal prices, and with companies like Shenhua weighing in with the National Energy Administration, policies curbing low-calorie coal imports are in some form or another expected within the next few months. It's their effectiveness that will remain an ongoing question as various actors seek leverage in energy pricing priorities.
