The China Factor in Coal Pricing – Implications for imported Coal in India 19 th November, 2012 Hotel Ashok, New Delhi Ashish Gupta, Associate Fellow, Observer Research Foundation

The China Factor  India is expected to double its coal use by 2035  Overtake USA as the 2 nd largest coal consumer by 2025  Become the world’s largest coal importer by 2020  In 2009 China became the net importer of coal  138 Mt; more than 15% of the globally traded coal  by 2010 Colombia and USA were exporting to China  By 2011 China overtook Japan as the world’s top coal importer  China’s presence in the global coal market: bigger than any other country for any other fuel. China Factor is important for Indian import strategy

 80 % of the Coal imports just from the 6 countries  Australia, Indonesia, Russia, USA, South Africa & Colombia  40% of the coal exports is controlled by 9 countries  Coal market is global and increasingly liquid  Russian/ Colombian coal producers can change their export destination from the Atlantic to the Pacific basin  If Chinese utilities emerge with largest premiums coal will flow toward china  Paper based trade is now 10 times the value of physical coal trade  Possibility of financial speculation driving prices rather than fundamentals of demand and supply The Global Coal Market – Some key Facts Global coal prices will be volatile

China importer or exporter?  MIT study concludes that China will be cost minimiser  Can be a buyer or seller depending upon the price relationships  China’s coal reserves are in the northern and western part of china  Demand is concentrated in the northern/ southern coastal belt  Northern markets are served by truck and rail route  Truck and rail routes are prohibitively expensive for southern markets Supplemented by coastal shipping through eastern ports Buyer can choose between domestic or international coal depending upon the prices  This arbitrage opportunity allows Chinese buyers to take advantage of the price differentials between domestic and international coal China’s entry into the global market will drive up the prices

Arbitrage opportunity  Until 2009, the price differentials between domestic and imported coal in China favoured domestic coal.  In 2008, CIF price for Australian coal was higher by about $65/ tonne compared to Chinese coal.  With the onset of the global recession by the end of 2008, Indonesian coal was cheaper than Chinese coal by $40/ tonne and Australian coal cheaper by $29/ tonne.  Even Russian coal was cheaper despite the huge distance disadvantage.  Huge arbitrage opportunity as macroeconomic impact of the global financial crises was comparatively smaller in china and other developing countries  Domestic coal prices was high due to  Mine consolidation, implementation of safety standards, simultaneous breakdown in agreement between coal producers and power generators over prices.  China’s policy of ‘Two Markets, Two resources’ encourages coal users to import coal when economics justifies it. India just imports irrespective of the economic advantage

World’s largest coal arbitrager: China  China trade behaviour is fundamentally different from that of India which is structurally short of coal.  The ‘China Factor’ is thus not about China emerging as a net importer.  It is the emergence of China as the worlds largest coal arbitrager.  Which introduces a large element of uncertainty in the market.  The international market for coal is now more sensitive to developments in the margin China’s very large volumes of coal production and demand which will determine its net trade position.  Global coal trades inventory will rise to 812 Mt by with most of it going towards China. India will have to choose between no coal and unaffordable coal.

Million metric tones (Unit for red line only) Chart Prepared by ORF , , , , , , 2007 Major coal price indices (USD / metric ton) & Chinese net imports in Million metric tons

Why China will Enter and Exit Repeatedly  Chinese government is too under continued pressure to reduce their carbon emissions.  To give impetus to their renewable energy program.  Shanxi province (heavily industrialized region of south east China) embarked on the major campaign of closing down small and inefficient mines.  Insufficient rail and road network.  Transporting coal to the region is very costly. Arbitrage is not the only factor.....

Questions for India  Both Indian Pvt. Sector/ Government are promoting coal imports as solution for domestic constraints in increasing coal production.  Given India’s foreign exchange constraints import of coal added to import of oil will be huge strain on the exchequer.  Domestic reforms should be prioritized over all other strategies for augmenting coal production. Imports can not be a panacea for all the problems

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