Coal miners could be severely affected by the Chinese government’s decision to ban the usage of lower-grade coal in its most populous urban centres.
The Chinese government has announced that it will introduce a ban on the import and domestic sale of coal containing high levels of ash and sulphur starting from next year as part of efforts to address the country's burgeoning urban smog problem.
The new regulations issued by China's National Development and Reform Commission (NDRC) sets a range of requirements for the grades of coal imported from abroad, as well as mined and sold domestically.
The key content of the new regulations for overseas coal miners are its strict prohibitions on the burning of lower grade coal by China's largest and most affluent population centres. These include the urban conurbations of the southern Pearl River Delta, where the Guangdong province capital of Guangzhou is located, the eastern Yangtze river Delta, where the financial hub of Shanghai is situated, as well as Beijing and the adjoining mega-city of Tianjin in the north.
All of these areas will be subject to prohibitions on the burning of coal containing more than 16 per cent ash and one per cent sulphur starting from January next year.
Given the economic importance of the regions covered by the prohibition, they could have a severe impact on Australia's coal mining industry, which exports as much as a quarter of its output to the PRC. Australia exported 54 million tonnes of thermal coal and 30 million tonnes of metallurgical coal to China in 2013 alone.
According to consultancy Wood Mackenzie, all of this thermal coal exceeds the new ash limit, given that Australian miners developed a high ash product with the Chinese market specifically in mind. This product can be washed in order meet the stringent new requirements, although it remains to be seen whether Chinese buyers will be willing to pay a premium for the cleaner product.
Major mines in Australia whose coal products fail to satisfy the new restrictions include Glencore's Mangoola mine, Rio Tinto's Hunter Valley mining operations and Bengalla mine, and BHP Billiton's Mount Arthur coal developments.
While the Chinese government claims that the move is intended to address worsening air pollution, skeptics within the mining industry say it is partially designed is to lend succour to domestic coal miners, with measures including a reduction in China's coal import levels by 50 million tonnes during the remainder of this year alone.
The Minerals Council of Australia has made haste to play down the potential implications for Australian coal exports.
"There is nothing in the information released to date to suggest that Australian coal exporters will be disadvantaged and we are confident that we can meet the proposed specifications," said Greg Evans, executive director of the Minerals Council.
Evans points out that Australia is host to reserves of high-quality black coal that can satisfy the new requirements, while also remaining in strong demand in other emerging markets.