Wednesday, May 29, 2013

The big news from the last two weeks is the increased likelihood that China will ban imports of low-calorie coal. There is one potential bright spot with increasing natural gas prices in USA. Well, a bright spot if you are a coal company, or a railroad that hauls coal and didn't rush to gas-powered locomotives (which is probably all railroads). 

CHINA POLICY CHANGE
Winners: China's domestic coal industry; picnicking humans and other mammals. Also, those who can buy coal in the import market and quietly sell it on domestic market will get rich, and can send their kids to one of the two Beijing prep schools with a pollution dome.  Losers: China's domestic electricity producers and consumers, sellers of air filtration systems and pollution domes, Indonesian and Australian miners, and mining stock promoters in the U.S.A.

Market reports that China's National Energy Administration is considering a proposal to outlaw the import of some grades of lower calorific thermal coal has been greeted with a mixture of consternation and disbelief by participants in the Asian seaborne market Thursday. (Loyal readers of the Biweekly AKRR Pacific coal market report of course experience no consternation or disbelief as they had read thoroughly and with care all of my prior emails) 

China's proposed ban on imports of low calorific value thermal coal will have a serious impact on Indonesian sub-bituminous coal prices, industry sources said Thursday. . . A Singapore-based coal trader said he believes that if the ban is immediately imposed Indonesian sub-bituminous coal prices will drop by at least $5/mt "considering the volume of low rank coal exported to China at the moment."

China may impose higher quality standards for imported and locally traded coal to cut air pollution, two sources said, in a move that could slash imports while boosting the fortunes of a faltering domestic industry.

USA
"Our analysis shows if U.S. gas prices come to around $5 mmBtu - it is about $4.30 per mmBtu now - we may well see coal come back," Fatih Birol, chief economist of the International Energy Agency, told reporters at an industry conference.

One of the things I learned during my failed indoctrination at the University of Chicago (my socialist comrades at the LSE got to me first) was that if something is cheap folks buy more of it and the price will go up. Also, production will not increase if the marginal cost of production is below the current price. Sounds like the current gas market. Any readers been following the multiple downward revisions  in estimates of recoverable natural gas reserves in shale gas territory (and by revisions I mean cutting in half, twice-over)?  

U.S. Coal Exports: National and State Economic Contributions  National Mining Association - May 2013 
prop·a·gan·da; Noun
1) Information, esp. of a biased or misleading nature, used to promote or publicize a particular political cause or point of view.
2) The dissemination of such information as a political strategy.

JAPAN
A spike in Japan's thermal coal imports in April was more a short-term push to accommodate new coal-fired power generation capacity coming online rather than any sign of a sustained long-term trend, according to a report by Macquarie Commodities Research.

Tepco Started Two Coal-Fired Units in April, Boosting Demand for Relatively Cheaper Coal While Limiting Oil Use
Japan's thermal coal imports rose while oil imports fell in April, reflecting increased coal-fired output at electricity utilities. The trend of coal replacing relatively more expensive oil will likely continue until the summer, as higher temperatures could force generators to use all available capacity.


AUSTRALIA
Australian coal miners are steeling themselves for years of production cuts, job reductions and asset sales as swelling shipments from international rivals lower hopes of a recovery in prices for coal . . . To boost their thinning margins, miners in Australia such as BHP Billiton, Rio Tinto, Glencore Xstrata and Peabody have trimmed output and laid off thousands. Clinging to barely profitable operations, coal producers now face the prospect of further cost-cutting, which they fear could benefit rivals when the market recovers.

Analysts said the regulations, which would ban coal with a net calorific value of 4540 kilocalories per kilogram or less, would favour Australian coal at the expense of our main coal competitor, Indonesia, although there was the chance Chinese domestic production would fill the void.

has ruled out further expansion of its coal mining business for now, instead flagging the possibility of more asset sales as it focuses on cutting costs to defend against a weakened outlook for the commodity.

MORE CHINA
China’s proposed ban on lower-quality coal imports is likely to boost domestic benchmark prices by as much as 8 percent as supplies drop, according to Fenwei Energy Consulting Corp.

Spot cargoes at the port of Qinhuangdao, a benchmark for the nation’s power station coal, may increase by as much as 50 yuan ($8) per metric ton, Luther Lu, a chief market analyst at the consultancy in Taiyuan, said by phone yesterday. Domestic power plants may buy more coal from Newcastle in Australia or South Africa if prices rise, he said.

China is considering a ban on imports of some lower-quality thermal coal grades, the Economic Information Daily reported May 16, citing an announcement at a conference held by the National Development and Reform Commission and the NEA this month. Nobody answered three calls and a fax to the NEA’s press office in Beijing today.

“Such draft regulation, if carried out, will ban China from getting at least 60 million to 70 million tons of coal imports, mostly lignite,” said Lu.

But a recent report by Wall Street colossus Goldman Sachs says this will be a transformational year for China, with its seaborne coal imports dropping for the first time since the global financial crisis of 2007 and 2008 and continuing to decline in the coming years. China’s own coal production has spiked, Goldman Sachs said, along with investment in Chinese railroads to move its coal.

China, with its cities shrouded in smog, also is trying to improve energy efficiency and diversify its fuel mix, including investments in nuclear energy and wind power, according to Goldman Sachs. Deutsche Bank also said in a report released this month that there are increasing signs of “softer Chinese coal demand growth going forward.”

You can be a government official but you still have to breathe 

China's new leadership seems to have a new slogan - "control coal" - and Australia's coal exporters underestimate their resolve to cap consumption of the fossil fuel at their peril, a Chinese researcher says.
China's leaders under President Xi Jinping say they plan to enforce a target of limiting annual coal use to 4 billion tonnes – about half the world's total - by 2015.

While estimates vary about how close to the cap current consumption is, the determination to limit the amount burnt each year should be taken seriously, said Yang Yilun, a senior associate with the US-based World Resources Institute.

“People tend to think of China's coal demand as something that will rise forever, and so, overlook the potential risks,” Ms Yang said.

Australia's plans for new coal mines and expansions of old ones that will come on stream in five to 10 years “will probably be the most affected because there will be a serious mismatch”, she said. “You will be ready at a time China's coal demand has reached its peak, and [beginning] a sharp decline.”


Tuesday, May 14, 2013


ARRC May 14th Update

The last time the concentration of Earth's main greenhouse gas reached this mark, horses and camels lived in the high Arctic. 
Is it time for entrepreneurial Alaskans to start raising camels in the Mat-su Valley? Bactrian or dromedary better suited? I lean Bactrian.

The global thermal coal market will remain oversupplied this decade as dwindling demand for the fuel clashes with rising production, Deutsche Bank said on Thursday.
Thermal coal prices have already dropped around 30 percent since last peaking in 2011 after the nuclear reactor meltdown at Japan's Fukushima power station triggered a boom in coal and gas imports from the world's third biggest economy. Since then, healthy production from coal exporters such as Australia, South Africa and Colombia have clashed with slowing demand from key users in North America, Europe and China, and Deutsche Bank said this trend was set to continue until 2020. 

European coal prices need $80 rise for gas to become competitive- Deutsch Bank (Reuters) - Deutsche Bank seemingly contradicts itself by recommending that traders go long coal and short gas. If you are a market-neutral, spread trader, this recommendation is for you.  A steady decline in European coal prices that has coincided with a tight gas market means that coal prices would have to rise by almost $80 per tonne in order to restore competitiveness to gas for power generation, Deutsche Bank said on Tuesday.

RIP King Coal? Summary piece in the Diplomat blog, recapping where the market stands after the end of Japan / Australia contract price negotiations as well as other consequences of the commodity market hang-over.
King Coal’ may not have been dethroned, but the industry’s recent challenges has left the region’s producers badly bruised. A slump in prices has seen a spate of mine closures, job cuts and earnings downgrades across the Asia-Pacific as coal miners have belatedly come to grips with the end of the boom. Falling Chinese demand, the impact of the U.S. shale boom and rising production have seen prices halve from their peak levels.

USA
Kinder Morgan Inc. decided not to seek permits at the Port of St. Helens industrial park because of the site's logistics, not because the debate over coal exports from the Pacific Northwest to Asia, said spokesman Allen Fore.

Senator from Kentucky has ideas on how to create jobs in West Virginia.

AUSTRALIA
Glencore Xstrata will stop work on a planned 35 million tonnes per annum coal export terminal on Australia's Balaclava Island as a result of poor coal market conditions, the company said on Monday. "This decision has been made as a result of the poor current market conditions in the Australian coal industry, excess port capacity in Queensland, specific shipping limitations and concerns about the industry's medium-term outlook," it said in a statement.

SYDNEY—Unions representing workers at Australia's biggest coal-export terminal have threatened imminent industrial action as a row with Port Waratah Coal Services over job security escalates. PWCS, which counts Rio Tinto RIO.LN +0.93% PLC and Glencore Xstrata GLEN.LN +0.92% PLC as users and major shareholders, exports mostly to Japan and China. The terminal handles more than 105 million metric tons of coal annually at its facilities in the city of Newcastle in Australia's New South Wales state.

Vietnam plans to import coal from Australia to help it meet rapidly growing energy needs that are being driven by economic growth averaging 7% over the past decade. Vietnam, once a major coal exporter, has seen its foreign sales nosedive as supplies are being kept home for domestic use. Exploitation of abundant reserves of offshore natural gas is going slowly, in part due to commercial wrangling, and Vietnam’s first nuclear power plants won’t start generation until at least 2020.

CHINA
Liu Tienan is the highest profile official to be investigated under the new Xi Jinping government anti-corruption campaign. Liu is the first real "tiger" to be caught in the "tigers & flies" campaign.

China moves to reform energy taxes - FT/ Leslie Hook 
The tax reforms will shift from volume-based taxes, set years ago and generally very low, to value-based taxes that will fluctuate alongside commodity prices. The new system was implemented for oil and gas late last year, and is expected to be extended to coal and other commodities. . .  Details about the coal tax have been scarce, but analysts believe Beijing will follow the oil and gas model and introduce a value-based tax of about 5 per cent on coking and thermal coal. At current thermal coal prices that would equate to a tax increase of about Rmb 20 a tonne, resulting in more than Rmb 60bn of additional taxes per year. . . Analysts say such an increase is likely to be paired with a streamlining of the local taxes on coal miners, which can vary significantly among provinces, to ameliorate the impact on coal miners’ balance sheets.

China introduced a round of reforms in November in which the resources tax for oil and gas moved from volume-based to a value-based tax, set at 5 percent of the value of the oil and gas produced. China National Offshore Oil Corp. in its 2012 annual report said the revised tax policy increased oil production costs by nearly 17 percent per barrel. But those reforms didn't include coal, which is still taxed by volume and accounts for about 70 percent of the country's energy generation . . . In March the government set a target to cap coal consumption to 4 billion tons by 2015. . . While there are no exact details about a possible coal tax, analysts say the government likely would follow the oil and gas model and introduce a value-based tax of about 5 percent on coking and thermal coal.

Global Times reported that Chinese coal companies have seen their profit margins shrink amid sluggish demand and an influx of cheaper coal imports. 

Chinese coal miners are likely to cut output more to curb losses after a flood of cheap imports and higher hydro power output hit domestic demand in the world's top producer and consumer of the fuel, miners and traders said. . . Smaller miners with higher costs were first to reduce output as the global coal market struggled to absorb abundant supplies, while bigger producers may be forced to follow suit. As the world's top importer, China's demand influences trade flows and prices worldwide.

China is witnessing another round of coal mine production cuts. Nearly half the coal mines in Ordos, North China's Inner Mongolia Autonomous Region have cut production because coal prices have fallen to a near three-year low, industry insiders said Wednesday.
Some small coal mines in the region have even halted production, and only big ones such as China Shenhua Energy Co are still in operation, media reports said. 
Ordos produced 597 million tons of coal in 2012, accounting for over 16 percent of China's total coal production, the 21st Century Business Herald newspaper reported Wednesday. 
Coal prices have been falling since the beginning of this year. Currently quality thermal coal is priced at around 650 yuan ($106) per ton, a 20 percent drop compared with the same period last year.

China has ordered production suspended at all coal mines in the southwestern province of Sichuan after a blast on May 11 killed 28 workers. Sichuan produces less than 1% of China's coal but these kinds of disasters are behind the drive to close down smaller mines.

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