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Chinese environmental policies might affect its long term coal consumption

The non-OECD countries have been leading the world in the coal demand and coal has grown in demand as no other energy sources with China as its major consumer. This demand has grown faster than any other fuel in since 2000. With oil making up around 20% of Chinese energy demand, China remains highly dependent on coal consumption in its power generation and industry.

According to China’s pattern of fuel consumption, most electricity is generated from coal, industry and construction account for about 70% coal use.

“China is a 1 bn people economy which has been growing at two-digit pace for a decade fueled almost exclusively by coal”, says Keisuke Sadamori, Director for Energy Markets and Security, International Energy Agency. “Energy efficiency goals, pollution will eventually reduce demand but it’s still over 65% of primary energy in China which is hard to reduce quickly”.

However, the coal industry is now very much leveraged to the aggressive anti-pollution policy. Keisuke Sadamori, points out that high pollution levels in China come from various sources: 25% particles come from coal, and more than 30% from vehicles. The state policy is set on improving the air quality without undermining the economic growth. This will be done through diversification in the power sector with nuclear and renewable power and promotion of the use of as much gas as possible. Gas demand in China will double in the coming 5 years, and will continue to grow, therefore the recent Russia-China 1.3tcf gas supply agreement will be a challenge for the industry from 2018.

The incremental renewable generation capacities by 2035 could be larger than those to be deployed in US, Japan and Europe combined, remarks Keisuke Sadamori.

According to Dian Bo Zhang of Baoshan Iron and Steel, China’s crude steel capacity utilisation has been falling (currently around 75-80% utilization) due to drop in its profitability. The environmental issues have acted as a constraint on the industry, leading to a surplus in the seaborne and domestic coking coal markets further squeezing the industry.

Some at the conference suggested that if China contines to pursue its anti-pollution policy the demand for coal will decrease; with the current concerns around overproduction, this drop in Chinese consumption will significantly affect the coal industry globally, even if this happens gradually. Others suggested that they don’t expect this decrease to happen short-term with still much dependency on coal in China, and that other countries such as India will pick up the demand growth in the long term.

China is in a unique position being able “to manipulate the market if not to dominate it at least in the foreseeable 3-5 years”, according to Ken Farrell, Director, PT Bumi Resources and Commissioner of KPC. China needs low thermal coal prices to keep up its economic growth pace. Due to the size of the Chinese market even a small drop in imports could affect the price globally.

Experts anticipate demand growth to shift from China to India as well as other ASEAN markets. At the moment India, Indonesia, Vietnam have an aggregate population of 1.5bn people for whom consumption per capita of electricity is only around 1mwh.year (versus Malaysia ~4.2MWh/y), says Keisuke Sadamori. According to an IEA report, ASEAN coal demand will grow by 6% per annum, versus gas ~2%per annum, and by 2035 coal will provide about half of entire ASEAN electricity demand.
This content is provided by Coaltrans Conferences for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

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