China’s appetite for coal has likely peaked

A recent Greenpeace report found China’s coal consumption declined in the first half of this year, while new Chinese government data suggest the country’s coal imports have dropped. Estimates indicate that by year-end, China’s coal imports could be 8% below last year's level.

China imported 18.9 million tonnes of coal last month, the lowest amount since September 2012. Part of the reduced demand reflected a slowing Chinese economy. After years of double-digit growth rates, China’s GDP expanded by just 7.7% last year, and it could struggle to hit its 7.5% target this year. Some analysts are predicting an average growth rate of only 6% in the coming years.

But a lower GDP growth rate is only part of the reason. As Justin Guay of the California-based Sierra Club pointed out, China may be beginning to “decouple” its growth from coal consumption. In other words, China’s economy could continue to expand even while its coal consumption drops, something unthinkable not long ago.

That’s due in large part to China’s declared “war on pollution” announced earlier this year.

Years of increasingly choking smog have sparked public anger and even led to protests. Last year, a government survey of 74 Chinese cities found all had pollution levels exceeding those the World Health Organization deemed safe.

“We will resolutely declare war against pollution as we declared war against poverty,” Premier Li Keqiang said in March. The plan calls for the closure of old and dirty steel, cement and coal plants — an estimated 1,725 small-scale dirty coal plants are expected to be shuttered. The government also declared it would spend US$275 billion in the next three years to reduce pollution.

China has also set up environmental courts, instituted fines for offenders of environmental standards and granted non-governmental organisations the right to sue polluters and now requires the nation’s largest factories to disclose pollution data to the public.

The efforts are starting to pay dividends, as evidenced by declining coal import levels. This is a major reason international coal prices have reached their lowest levels in six years. And the low prices are not succeeding in stoking a resurgence in demand.

And more declines could be coming thanks to a series of proposed new laws. The central government on Sept 10 released a draft version of a law that amounts to an outright ban on coal with a high sulphur and ash content. This could significantly hurt coal exporters, notably Australia and South Africa.

The government is also seeking to cut coal production by 10%, as low demand is causing economic losses for 70% of China’s coal companies.

Moreover, China is considering a permanent limit on the overall consumption of coal. The current five-year plan aims at consumption of 4.1 billion tonnes of coal next year, up from 3.7 billion tonnes last year. But in the next five-year plan, from 2015-20, China could cap its coal consumption at the same level of 4.1 billion tonnes a year or even ratchet it downwards.

And in 2016, efforts to slash coal demand are likely only to accelerate, considering China’s announcement that it would introduce a nationwide cap-and-trade scheme. Details are murky, but if successfully implemented, major producers will be incentivised to improve efficiency and switch to cleaner sources of energy.

As the world’s largest consumer of coal as well as the world’s largest emitter of greenhouse gases, the significance of China’s policies on coal use cannot be overstated. Thanks to a concerted effort by the government to improve air quality, the era of insatiable Chinese demand for coal could be over.

Nick Cunningham is with Oilprice.com. For more information, visit www.oilprice.com/energy/coal/why-chinas-insatiable-appetite-for-coal-has-likely-peaked.html