Will China’s “Control Coal” Policy Impact the US?

With smog so bad it has “broken the air-quality index” in Beijing, China’s pollution issues are no secret. It is thus unsurprising that the country’s leaders have adopted what The Sydney Morning Herald (SMH) describes as a “control coal” policy. While that has environmental pundits pleased, the news may not bode so well for the United States, which, according to the McClatchy Washington Bureau, hopes to sell excess coal to Asia via proposed terminals close to Bellingham and Longview.

China currently accounts for nearly half the world’s coal consumption, The Sacramento Bee recently reported. For the US, the issue is that the nation intends to keep it that way: by 2015, China intends to limit its annual coal use to 4 billion metric tons (MT), approximately half the world’s total, SMH states. To do so, the country, under President Xi Jinping’s leadership, will take various measures, such as launching a carbon tax, likely by 2015 or 2016, and investing in renewable energy sources like solar and wind power, The Sacramento Bee notes.

Experts agree that a decline in Chinese coal consumption is coming. Goldman Sachs (NYSE:GS), for instance, believes that this year, China’s seaborne coal imports will drop for the first time since 2007, declining still further in the coming years, according to McClatchy. Analysts polled by Reuters are of the same opinion; they believe that the country’s imports will drop by 10 percent this year, to 210.8 million MT, compared to last year.

Does the United States need to worry? 

However, none of this news seems to have deterred those involved in US coal export plans. For instance, Beth Sutton, a spokesperson for Peabody Energy (NYSE:BTU), which wants to ship its coal to Asia through the Bellingham terminal, told McClatchy, “[w]e see imports from China and India growing by more than 50 percent over the next five years, representing some of the fastest growing imports in the world. China’s coal imports are expected to rise more than 10 percent this year, and India has now surpassed Japan as the second largest thermal coal importer.”

Based on this statement, it appears that Peabody expects the combination of Chinese and Indian demand for coal to remain strong enough to sustain its export plans.

However, Yang Yilun, a senior associate at the World Resources Institute, told SMH that lower consumption in China will affect new coal mines and expansions of older coal mines in Australia. That’s because they will “be ready at a time [when] China’s coal demand has reached its peak, and [is beginning] a sharp decline,” she said. If China is not importing coal from nearby Australia, it seems unlikely that it would be interested in US coal.

SMH also notes that Australia runs the risk of having its coal exports overshadowed by China’s if the nation curbs its coal needs enough to once again become a net exporter. That possibility raises the question of whether any Asian nation will be in need of US coal in the coming years.

Deutsche Bank (NYSE:DB) analyst Michael Hsueh told McClatchy that hope lies in the fact that Rocky Mountain coal from the Pacific Northwest is competitive in South China with South African coal and “cheaper than Australian and Russian coal when adjusted for energy content.”

What’s next?

While Peabody Energy and other coal companies are eager to see their coal make it to Asian markets, their enthusiasm belies the fact that debate is still raging over whether the terminals that would take US coal to Asia should even be built. Among other things, residents of the coastal cities where the terminals would be built are concerned about traffic congestion and pollution from coal transportation trains.

Some who are against the terminals have even farther-reaching concerns, an article published by The Economist states. Campaigners from Power Past Coal believe that sending coal to China will “lower prices and encourage [China] to prolong its reliance on the filthy fuel.” On the same note, Washington legislator Reuven Carylye has stated that “[s]hipping coal to Asia is about as innovative as a tree stump.”

Construction will not begin until 2016 at the earliest, according to The Economist. For now, investors would do well to keep an eye on the situation in China and consider which US coal miners are banking on sending their product to China.

Securities Disclosure: I, Charlotte McLeod, hold no direct investment in any company mentioned in this article.