The Chinese government is continuing its hardline policy against coal, revealing that it will ban construction of new coal-fired power plants in areas with surplus power supply.
The new measures were confirmed on Monday by China’s top economic planner, the National Development and Reform Commission (NDRC), and tell us the campaign against overcapacity in industries such as steel, coal mining, cement and chemicals, is very real.
The government has previously said it will look to curb thermal power overcapacity; but now the policy has been confirmed by the NDRC is the clearest signal yet that it won’t tolerate new coal capacity in regions that already have excess supply.
Weaker demand for coal inside China could ultimately lead to higher exports, which would exacerbate the overhang of excess coal stocks on global markets. In fact Chinese coal companies have started shipping coal into the Asian basin – exporting 900,000 tonnes in March.
Should exports expand, it will step up downward pressure on world coal prices (Australian thermal coal is currently selling for around $50 a tonne – down 10% so far this year according to some indexes). The sum total of these measures is more negativity for the coal sector in Australia, Indonesia, Canada and the US.
The US industry has already seen some of its biggest miners collapse – Peabody Energy, the largest, is the most recent example. In Australia we are likely to see more mine sales (Glencore and Anglo American are already sellers) and mergers.
In addition to these moves, the NRDC says that if there are regions that are short of power, the government will give preference to new-energy power projects and arrange for transporting more electricity across provincial borders, rather than approve new coal mines and power stations.
The regions that could be affected most by the NDRC’s new measures include the coal-rich areas of Inner Mongolia, Xinjiang and others across northeast China.
The Wall Street Journal says the requirements of the NDRC "effectively strengthens central-government oversight over new coal-fired power capacity after years in which local governments pursued new projects as a way to boost local economic growth. That has contributed to falling utilization rates at power plants across much of China’s industrial heartland."
In addition to limiting coal capacity and use, the government has also moved to to raise the proportion of clean and renewable energy in the overall energy mix.
Despite the government’s pledge to promote new energy sources like solar and wind, coal still accounts for about two-thirds of China’s primary energy consumption and will continue for years to provide the dominant share.
The China National Coal Association forecast on Monday that coal demand would grow about 2% annually over the next five years and hit 4.3 billion metric tonnes by 2020.
That 2% growth rate is sharply lower than the 9% average growth from 2000 to 2010.
The Association says that over the next five years the coal industry will look at restructuring and upgrades, which means cutting capacity and more mergers between producers, many of whom are losing money and struggling.
China’s coal consumption fell 3.7% in the first quarter of this year, to 910 million tonnes.
That reflected the government’s move to downplay coal in its energy mix, which saw coal’s share of the primary energy drop to 64%, down 4.5 percentage points from 2012.
China says it wants to bring the share of non-fossil energy to 15% by 2020 and 20% by 2030. More importantly, coal consumption will be limited to 62% of energy use by 2020.
The State Council has already announced plans to slash capacity in the coal industry and will halt approvals of any new coal mines before the end of 2019.
The Council says that over the next three to five years, the government will shut down 500 million tonnes of capacity and consolidate another 500 million tonnes via mergers to create the most efficient mine operators.
