In an effort to clean up the choking smog in many major Chinese cities, the Chinese government plans on banning imports of high sulfur coal. It will still import coal, but will instead only allow coal of a higher quality that will contribute less to air pollution. The central government has made tackling air pollution a higher priority this year than in the past, as out of control pollution raises concerns among government officials about social unrest.

Also, the government is increasingly focusing on environmental indicators (which seem to grow worse with each passing year), eschewing a long-held “growth at all costs” mantra that drove government actions for the last few decades.

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The Chinese economy reported gloomy economic numbers for the month of March, which showed that both imports and exports declined. Not a common occurrence for an economy used to high growth rates, Chinese exports dropped by 6.6% last month, and imports fell by an even greater 11.3%, indicating that the economy is beginning to slow. On the other hand, China’s economy may have been overstated in 2013, as the Wall Street Journal reported that economic analysts believe that Chinese companies were “overinvoicing” – a technique used to get around state capital controls. Therefore, by comparison, the most recent data may look extra poor as the Chinese government began to crackdown on overinvoicing.

The slowing economy suggests that coal consumption may grow at a much slower pace than once thought. A top Chinese official at the National Energy Administration recently said at a conference that consumption of coal would grow only “slightly” this year. Still, China’s coal consumption is at an all-time high, having hit a record 330 million tons in 2013. But since China consumes as much coal as the rest of the world combined, alterations in the trajectory of Chinese coal demand will have major impacts on coal markets worldwide.

Many U.S. coal producers have relied increasingly on overseas markets as American utilities switch to other sources of fuel. But China, the coal growth engine, may not be as robust as once thought. It plans on reaching a limit on its coal consumption in the next few years. By restricting high sulfur coal, however, Chinese coal imports could slow much quicker than many expect, putting downward pressure on global coal prices. UBS predicts that coal prices could remain weak due to oversupply.

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Softness in the coal market is battering U.S. coal stocks, already reeling from a shrinking domestic market. Just last week, coal stocks seesawed as a few were upgraded and several more were downgraded by market watchers. James River Coal Company, a coal mining company based in Appalachia, announced that it was filing for bankruptcy after markets closed on April 7. Last November, it announced that it would close four more mines, bringing the total number of mines it is shutting down to twelve. It has largely been killed off by cheap natural gas and environmental regulations.

UBS announced that it was downgrading Alpha Natural Resources, Arch Coal Inc., Walter Energy Inc., to “sell” from “neutral.”

The downgrades to “sell” across the coal industry may be the earlier signs of the “carbon bubble” concept playing out in real time, which states that as governments move to make permanent limits on pollution, billions of dollars of investments could become stranded. Coal, as one of the dirtiest sources of energy, could represent enormous sums of “unburnable” carbon. Although the process will certainly be gradual, the shift away from coal seems to be more and more certain with each passing coal bankruptcy.

By Nicholas Cunningham of Oilprice.com