China Moving Towards Being the Largest Importer of Coal
When the International Energy Agency announced in 1994 that China had just become “a net importer of oil on an annual basis for the first time since the 1960s,” very few paid attention to what seemed just a statistic. However, that figure would transform oil markets and the global economy years later.
The consequences became obvious as China’s insatiable energy needs propelled the country towards its current ranking as the world’s biggest energy consumer. According to the IEA, Beijing’s use of oil, coal, wind and other sources of power more than doubled in the past decade to reach the equivalent of 2.26bn tonnes of oil in 2009, creeping past the U.S. total of 2.17bn tonnes.
China, which in 1993 imported a mere 30,000 oil barrels a day, about as much as Ireland does now, is these days buying 5m barrels a day, or the combined production of Kuwait and Venezuela. That oil is mainly coming from Colombia (35%), Australia (29%), Indonesia (10%), the U.K. (7%), Canada-West Coast (5%) and the East Coast of the U.S. (5%).
Commodities analysts and executives say that the 1993 shift was an example of a “China moment” – what happens when the world’s most populous country moves from being an exporter to a net importer of a particular resource (or vice versa in the case of finished goods).
The impact on prices is often not immediately clear. Over time, however, as the country’s import needs grow larger and larger, prices generally soar. It happened with oil and other commodities, including soybeans, as demand in China proved too much for its own geological or agricultural endowments.
Now it is the turn of coal. Last year, China became a net importer of coal on an annual basis for the first time since reliable records have existed. Including both thermal coal, used to fire power plants and coking coal, used for steelmaking, Beijing bought 104m tonnes of the commodity, compared with net exports of as much as 80m tonnes in 2003.
The shift is helping to revive the coal industry. After decades of being marginalized in the developed world, coal is being kept afloat by the requirements of China and India on top of already vast imports elsewhere in Asia, including Japan, South Korea and Taiwan. The speed of the upturn in demand has surprised many and the industry is not best placed to cope.
Mining executives, consultants, analysts and traders say that the mining industry has being waiting for this new “China moment” to profit from a rise in prices. They agree that China will need to buy significant amounts of coking and thermal coal from overseas from now on. Furthermore, the emerging industry consensus is that China will overtake Japan as the world’s largest importer of thermal coal by the end of this year, only three years after China became a net importer of the mineral used to fire power stations.
Coal is today the basis of China’s economy, fueling over 80% of electricity generation, double the world’s average, according to IEA. The western countries’ energy watchdog forecasts that China would add 500 gigawatts of new coal-fired electricity generation capacity between now and 2020, almost double Japan’s current total power generation capacity.
Only last year, China’s coal output grew astonishingly: 28.1% from first quarter 2009 to first quarter 2010, to over 750 million metric tons consumed in just the first quarter of 2010. This is, however, a situation that is patently unsustainable—not just because of the carbon emissions it entails, but because China simply does not have enough coal to continue increasing its consumption for much longer.
“Start with the stats and do some simple math,” says the website of the Post Carbon Institute, a nonprofit organization dedicated to helping the world transition away from fossil fuels.
“China is now mining and burning over three billion tons of coal per year. If the nation’s coal consumption grows at, say, 7% per year, that means consumption will double in ten years (its annual growth rate was actually over 9% in one or two of the last several years, implying a doubling every eight years—but let’s be conservative and assume 7% growth). In that case, by 2020 China would be using about six billion tons per annum,” says the Post Carbon Institute’s website.
The speed at which Chinese coal imports are growing is indeed surprising mining companies, traders and policymakers, who had not previously foreseen that China would overtake Japan before 2015.
In an interview with The Financial Times, Fatih Birol, chief economist at the IEA, says that “China’s imports of thermal coal could exceed Japan’s this year for the first time.”
The coal mining and trading industry largely takes the same view. Some traders believe that China and Japan will be “neck and neck” this year, while others say that Beijing could overtake Tokyo, based on the pace of imports so far this year.
China had net imports of 47.5m tonnes between January and May, up more than 120 per cent from 2009. If this pace is sustained, its net imports would hit 114m tonnes by December.
But traders expect a slight slowdown.
Beijing’s appetite for imported thermal coal bodes well for mining companies such as Xstrata, the world’s largest coal exporter, PT Bumi Resources of Indonesia, Anglo American and U.S.-based Peabody Energy. Commodities traders such as Glencore and Hong Kong-based Noble are particularly well positioned to cash in, executives say.
Greg Boyce, chief executive of Peabody, told investors recently that the world economy was at “the early stages of a long-term supercycle for coal.”
Policymakers are concerned about the impact of rising buying on global energy prices and carbon emissions. Birol, the economist at the IEA, says that China’s buying would underpin global coal prices, adding that “the increase in coal prices will increase electricity prices and increase the cost of manufacturing.”
Yingxi Yu, commodities analyst at Barclays Capital Singapore, says that even though China was moving towards more renewable energies, “coal will remain a primary source of fuel for the foreseeable future, simply because of the stability of supply and the fact that China is pretty rich in coal resources.”
China is already the world’s largest coal producer but domestic supplies cannot meet the growing demand. China’s efforts to consolidate small coal mines may be “keeping a lid on Chinese domestic production,” Yu says.
The situation is not very likely to change in the future. As the IEA’s latest annual World Energy Outlook puts it: “China is expected to remain a dominant influence on the world coal market as it swings from being a net coal exporter into a net importer.”
This time the agency not only recognizes the significance of the “China moment,” but it also acknowledges the dominance of China and India as markets that today consume about half of the world’s coal output, and that will be devouring two-thirds of it by 2030.
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