china coal & power outlook...banchero costa jan 2019 –china coal & power outlook 7 in...

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Jan 2019 – China Coal & Power Outlook 1

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banchero costa research

www.bancosta.com ; [email protected]

China Coal & Power Outlook(covering coal, lignite, and their demand from power sector)

January 2019

bancosta blue studies – volume DRY 2019/#01

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1. Coal Demand page 3

2. Coal Supply page 22

3. Coal Imports page 26

4. Final Words page 39

Index

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Coal Demand(power generation and consumption)

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China – the main coal consumer in the world

China is the world’s largest consumer of coal, accounting for around half of global demand. By far the largest source of domesticdemand is power generation, which accounts for around half of coal consumption in the country, followed by the iron and steelindustry, the cement industry and the chemical industry.

Move towards clean energy to continue chipping away at coal dependency in long term

After many years of double digit growth, which took coal energy consumption from 1.41 billion tonnes in 2000 to 4.24 billiontonnes in 2013, consumption declined over 2014-2016. This was in spite of continued increases in total energy consumption andoverall electricity generation. Such declines in coal energy consumption were partially due to a slowdown in the country’s economy,but most importantly due to the ongoing restructuring of the economy, as well as shift towards high-efficiency, cleaner burningtechnologies and renewable energy.

While the decline in China’s coal energy consumption reversed in 2017, growing by 0.4 percent due to a recovery in industrialproduction and increase in thermal power generation, the growth of clean energy sources continued to gain momentum. In 2017,natural gas and non-fossil fuel energy consumption grew 14.8 percent and 5.7 percent year-on-year respectively.

According to China’s National Energy Administration, coal energy consumption in Jan-Sep 2018 has continued to grow, supportedby strong demand across electrical generation, steel-making, and other industrial users. This is corroborated by the InternationalEnergy Agency (IEA), which estimates strong coal power generation in China in 2018.

However, with power generation from non-fossil fuels continuing to surge by 21.2 percent collectively over Jan-Nov 2018, Chinalikely remains focused on fulfilling their 13th five-year plan, which sets out ambitious targets for their energy mix by 2020 as theyseek to replace coal with cleaner fuels: Coal’s share of overall energy consumption should fall below 58 percent by 2020 (from 64percent in 2015; had already fallen to 60.4 percent in 2017). Gas’ share is targeted to increase to 10 percent (from 5.9 percent in2015; reached 7 percent in 2017). Non-fossil fuel energies should increase to 15 percent (from 12 percent in 2015; reached 13.7percent in 2017).

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China remains heavily dependent on coal-fired power plants, but gas progressing more rapidly

The Chinese power sector is currently still very much dependent on thermal power generation, which includes coal and gas-firedpower plants. Thermal power generation accounted for around 73 percent of China’s total power generation in 2018, of whicharound 91 percent are estimated to be produced by coal-fired power plants. Thermal electricity output in China grew 5.1 percent in2017 to reach 4,595 TWh, and continued to increase by a strong 6.8 percent year-on-year to 4,435 TWh in Jan-Nov 2018.

However, gas power generation has been picking up more strongly, with the China Electricity Council estimating that gas powergeneration increased 7.7 percent year-on-year in 2017, versus a 5.2 percent growth for coal power generation, as China continuesto fight air pollution by shifting both industrial and residential users from coal to gas usage.

Softer winter pollution control measures due to economic headwinds

In early July 2018, China released its 2018-2020 pollution action plan, detailing the expansion of pollution-reducing measures to 82cities across the country. The regions of Beijing, Tianjin, Hebei, Shandong, and Henan will be required to cut coal consumption by10 percent until 2020, while the Yangtze delta region will have to cut coal use by 5 percent.

However this winter, instead of imposing blanket production cuts on heavy industry, the central government has taken a softerstance by allowing local authorities to adopt measures based on regional emission levels. Previously over Oct 2017 – Mar 2018,China had curbed traffic and coal use, and also imposed “one size fits all” restrictions on industries like steel, aluminum and cementthrough 28 northern cities.

Targets for overall emissions cuts over the winter have also been revised down, with 28 cities in northern China required to cutlevels of PM2.5 by about 3 percent, compared to 5 percent in the earlier draft. The more lenient pollution control measures arelikely due to the central government reassessing their priorities, as they face economic headwinds of slowing domestic demand,rising trade protectionism, and U.S.-China trade tensions.

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Coal power capacity grows as cuts remain challenging for central government to implement

In the near term, coal-fired plants will still account for the majority of power generation in China, given lower costs and entrenchedeconomic interests. However, by 2020, the government aims to cap total coal power capacity at below 1,100 GW, with coal-firedpower generated mainly in western provinces and transmitted to the east via ultra-high-voltage lines. In line with these plans,Xinjiang and Inner Mongolia have seen fast growth in thermal power generation over the past 5 years, mostly using coal. Coastalprovinces Jiangsu and Shandong currently remain as key areas of thermal power output.

In 2017, China reported eliminating or suspending 65 GW of coal-fired power capacity, exceeding the national target of 50 GW. In2018, China announced plans to continue shutting inefficient coal-fired power generation units with capacity under 300,000 kW.The country aims to eliminate or halt a total of 109 GW of coal-fired power capacity by the end of this decade.

However, there have been concerns that the country’s coal-fired thermal power capacity has still been increasing, as coal-firedpower remains the cheapest and most readily available option for many local governments. Local governments are also having tojuggle pollution curbs, and the need to build more infrastructure and spur economic activity amid slowing demand and U.S.-Chinatrade tensions. Data from the China Electricity Council (CEC) showed China’s coal fired power capacity increasing 35 GW to 981 GWin 2017, even amid supposed intensive cuts in capacity. In Jan-Nov 2018, China’s thermal power capacity – mainly coal-fired –continued to increase 3.4 percent to 1124.7 GW.

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In 2017, growth in China’s energy consumption picked up by 2.9 percent to 4.49 billion tonnes of standard coalequivalent, mainly as usage of crude oil, natural gas, and non-fossil fuels gained momentum, while coal consumptiongrew by a minimal 0.4 percent. However, according to the China’s National Energy Administration, coal consumption inJan-Sep 2018 rebounded, growing across electrical generation, steel-making, and other industrial users.

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China - Annual Energy Consumption by Resource(source: national statistics bureau ; in billion tonnes of standard coal equivalent)

Coal Petroleum Natural Gas Hydro, Nuclear, Wind Power

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Electricity generation growth in China grew more than 5 percent in 2016. In 2017, growth in electricity generationcontinued at around 6.2 percent, as the economy picked up and generation from natural gas and non-fossil fuels gainedmomentum. In 2018, electricity generation is expected to grow around 7.5 percent, driven by growth in thermal powergeneration and other non-fossil fuels.

7.1% 13.3% 8.7% 4.5% 8.1% 5.7% 2.8% 5.2% 6.2% 7.5%

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China - Annual Electricity Generation(source: national statistics bureau ; in terawatt-hours)

Annual Electricity Generation Y-o-Y Growth

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There is naturally significant short term volatility month-on-month due to seasonal and weather-related patterns. Aftergrowth in electricity generation slowed in 2015, the positive trend has picked up again over 2016-2018.

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China - Monthly Electricity Generation - last 5 years(source: national statistics bureau ; in terawatt-hours)

Monthly Electricity Generation

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In the first 11 months of 2018, electricity output has continued to increase by 7.3 percent year-on-year to 6,100 TWh.After a lull in the beginning of the year with the Lunar New Year celebrations, electricity output tends to rise steadily toits peak during the summer months of July-August, before rising again at year end during winter.

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China - Monthly Electricity Generation - Seasonality(source: national statistics bureau ; in terawatt-hours)

2013 2014 2015 2016 2017 2018

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The Chinese power sector is still very much dependent on thermal power generation, despite significant investment inalternative energy sources, including hydropower, wind and nuclear. Thermal power generation, which includes coal andgas-fired power plants, accounted for around 73 percent of power generation in 2018. According to the China ElectricityCouncil, around 91 percent of thermal power generation are produced by coal-fired power plants.

Thermal73%

Hydropower17%

Wind5%

Nuclear4%

Other1%

China Power Generation by Source - 2018 (estimate)(sources: national statistics bureau, as percentage of output)

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Over the past few years, the expansion of electricity generation from nuclear and renewable energies has had asignificant impact in reducing demand for thermal generation. In 2012, hydropower and other non-fossil fuels accountedfor a collective 22 percent of electricity generation. However, this has since increased to around 27 percent in 2017-2018.

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China - Monthly Electricity Generation by Source(source: national statistics bureau ; in terawatt-hours)

Other Hydro Generation Thermal Generation

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After generally flat growth in 2014-2015 as hydro and other alternative power output expanded, thermal power outputhas since picked up over 2016-2018. In 2017, coal power output increased 5.2 percent and continued to account for amajority 91 percent of total thermal power output. While gas-fired power plants still form a small percentage of thermalpower output, such output increased a stronger 7.7 percent in 2017.

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China - Monthly Thermal Power Generation - last 5 years(source: national statistics bureau ; in terawatt-hours)

Monthly Thermal Electricity Generation

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In the first 11 months of 2018, thermal electricity output has continued to increase by a strong 6.8 percent year-on-yearto 4,435 TWh. Thermal electricity output typically has two peaks over the year: during the summer months July-August,and over December-January during the winter months. While gas-fired power plants still form a small percentage ofthermal power output, the government has been pushing to increase gas power to reduce pollution from coal.

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China - Monthly Thermal Power Generation - Seasonality(source: national statistics bureau ; in terawatt-hours)

2013 2014 2015 2016 2017 2018

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China Thermal Power Generation by Province – 2013 v.s. 2018(e)

Over past 5 years, Xinjiang and Inner Mongolia have seen fast growth in thermal power generation, mostly using coal –in line with government plans to increase coal-fired generation in inland provinces, and for power to be transmitted tothe east via ultra-high-voltage lines. Coastal provinces Jiangsu and Shandong currently remain as key areas of thermalpower output.

2013 2018(e)

Xinjiang

Tibet

QinghaiGansu

Inner Mongolia

Ningxia

Shaanxi

ShanxiHebei

Liaoning

Jilin

Heilongjiang

Shandong

Henan Jiangsu

Shanghai

Zhejiang

AnhuiHubei

Yunnan

GuizhouHunan

Jiangxi

Fujian

Guangxi Guangdong

Hainan

BEIJING

Sichuan

Chongqing

Xinjiang

Tibet

QinghaiGansu

Inner Mongolia

Ningxia

Shaanxi

ShanxiHebei

Liaoning

Jilin

Heilongjiang

Shandong

Henan Jiangsu

Shanghai

Zhejiang

AnhuiHubei

Yunnan

GuizhouHunan

Jiangxi

Fujian

Guangxi Guangdong

Hainan

BEIJING

Sichuan

Chongqing

> 4,000 TWh

Total Power Output

2,000 - 4,000 TWh

1,000 - 2,000 TWh

< 1,000 TWh

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One key reason for the decline in coal demand has been the boom in hydropower generation in China in recent years,although growth slowed from 24.6 percent year-on-year in 2014, to just 2-7 percent each year between 2015-2018.

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China - Monthly Hydro Power Generation - last 5 years(source: national statistics bureau ; in terawatt-hours)

Monthly Hydro Electricity Generation

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There is a strong element of seasonality to hydropower, and it can be significantly affected by droughts and otherweather patterns. Such volatility has an obvious indirect impact on coal demand. In the first 11 months of 2018, hydroelectricity output increased by 2.2 percent year-on-year to 1,034 TWh.

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China - Monthly Hydro Power Generation - Seasonality(source: national statistics bureau ; in terawatt-hours)

2013 2014 2015 2016 2017 2018

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China Hydro Power Generation by Province – 2013 v.s. 2018(e)

The development of hydro power generation in the Sichuan and Yunnan provinces have increased significantly, withoutput in these 2 areas almost doubling over the past 5 years. Meanwhile, hydro power output from the Hubei provincehas increased around 26 percent over the same period.

> 2,000 TWh

Total Power Output

1,000 - 2,000 TWh

< 1,000 TWh

2013 2018(e)

Xinjiang

Tibet

QinghaiGansu

Inner Mongolia

Ningxia

Shaanxi

ShanxiHebei

Liaoning

Jilin

Heilongjiang

Shandong

Henan Jiangsu

Shanghai

Zhejiang

AnhuiHubei

Yunnan

GuizhouHunan

Jiangxi

Fujian

Guangxi Guangdong

Hainan

BEIJING

Sichuan

Chongqing

Xinjiang

Tibet

QinghaiGansu

Inner Mongolia

Ningxia

Shaanxi

ShanxiHebei

Liaoning

Jilin

Heilongjiang

Shandong

Henan Jiangsu

Shanghai

Zhejiang

AnhuiHubei

Yunnan

GuizhouHunan

Jiangxi

Fujian

Guangxi Guangdong

Hainan

BEIJING

Sichuan

Chongqing

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Significant investment is also being made in wind and solar power, where China is a world leader, and in nuclear power,where China is now the fastest expanding nuclear power producer in the world. Such electricity generation has tripledsince 2013, and now accounts for around 9 percent of China’s total generation, compared to 5 percent in 2013.

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China - Monthly Wind/Solar/Nuclear/Other Generation - last 5 years(source: national statistics bureau ; in terawatt-hours)

Monthly Wind/Solar/Nuclear/Other Electricity Generation

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In the first 11 months of 2018, other sources of power generation, which include wind, solar and nuclear, havecontinued to increase by 21.2 percent year-on-year to 631 TWh.

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China - Monthly Wind/Solar/Nuclear/Other Generation - Seasonality(source: national statistics bureau ; in terawatt-hours)

2013 2014 2015 2016 2017 2018

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China Nuclear & Wind Power Generation by Province – 2013 v.s. 2018(e)

While generation from nuclear and wind power remain small relative to coal and hydro power, the volume of suchpower generation have been increasing most strongly in Fujian, Guangdong, Liaoning, Xinjiang, and Zhejiang. Increasesin Fujian, Guangdong, Liaoning, and Zhejiang have mainly come from nuclear power expansion, while the increase fromXinjiang and Inner Mongolia came from wind power expansion.

2013 2018(e)

Xinjiang

Tibet

QinghaiGansu

Inner Mongolia

Ningxia

Shaanxi

ShanxiHebei

Liaoning

Jilin

Heilongjiang

Shandong

Henan Jiangsu

Shanghai

Zhejiang

AnhuiHubei

Yunnan

GuizhouHunan

Jiangxi

Fujian

Guangxi Guangdong

Hainan

BEIJING

Sichuan

Chongqing

Xinjiang

Tibet

QinghaiGansu

Inner Mongolia

Ningxia

Shaanxi

ShanxiHebei

Liaoning

Jilin

Heilongjiang

Shandong

Henan Jiangsu

Shanghai

Zhejiang

AnhuiHubei

Yunnan

GuizhouHunan

Jiangxi

Fujian

Guangxi Guangdong

Hainan

BEIJING

Sichuan

Chongqing

> 50 TWh

Total Power Output

25 - 50 TWh

< 25 TWh

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Coal Supply(domestic production)

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China – the largest coal producer in the world

China is home to the world’s second largest proven coal reserves after the U.S.. According to the Chinese Ministry of Land andResources, proven coal reserves of 170 billion tonnes correspond to 19 percent of the world’s total. The country is also the world’slargest producer of coal, accounting for close to half of global production.

China falls short of coal production target of 3.7 billion tonnes in 2018

After reaching a peak in 2013, coal output in China subsequently declined over 2014-2016. According to China’s National Bureau ofStatistics (NBS), total output for raw coal fell 9.4 percent-year-on-year to 3.4 billion tonnes in 2016. This was mainly due togovernment measures to reduce coal production in Chinese mines by 54 days – down from 330 to 276 days a year.

As coal prices shot up due to a supply-demand gap, China scrambled to ease some of the limits and boost output ahead of peakwinter demand. Most coal miners thus escaped such output curbs in 2017, with China’s coal output increasing by around 2 percent.

According to China’s National Energy Administration (NEA), China aimed to increase coal output by 7.3 percent to 3.7 billion tonnesin 2018. However, domestic production fell short of this goal due to safety and environmental inspections, with coal productionover Jan-Nov 2018 only managing an increase of 2.5 percent to 3.2 billion tonnes. In 2019, domestic coal production is expected toincrease by around 100 million tonnes.

Elimination of inefficient coal production capacity remain on the agenda

Even as coal output in China continues to increase, elimination of inefficient coal mines remain on the agenda due to overcapacityin the country. The NDRC had announced that 800 mln tonnes of inefficient coal capacity would be cut over 2016 to 2020, whileadding 500 mln tonnes of “advanced” capacity. The reductions would be concentrated among smaller mines in the north-east,while large producers in the western regions, such as Inner Mongolia and Xinjiang, would boost supplies.

China shut down 183 million tonnes per annum (MTPA) of capacity in 2017 and 300 MTPA in 2016, exceeding the original target of150 MTPA and 250 MTPA for the two years respectively. In 2018, they had aimed to reduce coal capacity by another 150 MTPA.

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While China’s total coal output declined over 2014-2016, the downward trend reversed in 2017 with productionincreasing 2.4 percent to reach 3.45 billion tonnes. In the first 11 months of 2018, coal production has increased another2.5 percent to 3.2 billion tonnes. China’s 2018 coal production is estimated to have fallen short of their 3.7 billion tonnestarget set by the National Energy Administration (NEA), coming in at around 3.5 billion tonnes instead.

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esChina - Annual Domestic Raw Coal Production

(source: NBS of China ; in million tonnes)

Coal Output Y-o-Y Growth

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China Domestic Coal Output by Province – 2018(e)

Chinese raw coal output is concentrated in Inner Mongolia, Shanxi, and Shaanxi, making up just over two-thirds of thecountry’s coal production in 2018. Output from these 3 provinces saw the largest increase in 2018, in line withgovernment plans to increase coal production at inland provinces.

> 600 mln tonnes

Total Coal Output

200 – 600 mln tonnes

100 – 200 mln tonnes

< 100 mln tonnes

Xinjiang

Tibet

Qinghai

Gansu

Inner Mongolia

Ningxia

Shaanxi

Shanxi

Hebei

Liaoning

Jilin

Heilongjiang

Shandong

Henan Jiangsu

Shanghai

Zhejiang

AnhuiHubei

Yunnan

GuizhouHunan

Jiangxi

Fujian

Guangxi Guangdong

Hainan

BEIJING

Sichuan

Chongqing

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Coal Imports(volumes, sources, prices)

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Coal import restrictions could limit upside for import volumes in 2019

In the first 11 months of 2018, total coal and lignite imports increased a strong 8.9 percent to 270.5 mln tonnes. However, it is uncertain if 2018 full year imports will exceed the 2017 volume of 271.1 million tonnes, following the introduction of coal import restrictions in November and signals by the government to keep the year’s imports below 2017 levels.

China is now also said to be considering monthly coal import controls in 2019, instead of controlling import volumes on an annual basis – a sign that upside in import volumes may be more limited going forward.

Coking coal imports fell in 2018, while imports of steam coal & lignite rose

Coking coal imports appear to have eased in 2018, decreasing by 4.2 percent to 61.1 mln tonnes over Jan-Nov 2018, even as steel production increased 9.4 percent year-on-year over the same period to 851.4 million tonnes, likely due to Chinese mills requiring less coking coal as they increased scrap usage in steel making, some inventory run down due to high coking coal prices in 1Q 2018, and renewed coal import restrictions in November.

Over the same period, imports of steam coal and lignite increased by 13.5 percent year-on-year to 209.4 mln tonnes, due to strong demand in Q1 from a colder than expected winter and gas supply shortages, as well as overall strong demand for thermal power generation over the year.

Indonesian coal imports surge, while Australian shipments fall slightly

Indonesia and Australia dominate coal exports to China, accounting for 45 percent and 29 percent respectively of China’s import volume in the first 11 months of 2018.

Over Jan-Nov 2018, imports from Indonesia surged 11.7 percent year-on-year to 121.8 million tonnes, mostly from an increase in lignite shipments. While Indonesia supplies mainly lignite which are of a low calorific value, they tend to be low in sulphur and trade at a large discount to higher-quality thermal coal from Australia. They are thus useful for blending with higher-sulphur domestic supplies – for which China has been increasing production of. On the other hand, Australian shipments fell 2.1 percent to 78.4 million tonnes, largely as coking coal shipments decreased with easing Chinese import volumes.

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After a sharp drop registered over 2014-2015, China’s total coal imports increased over 2016-2017. In the first 11months of 2018, total coal and lignite imports have increased another 8.9 percent to 270.5 mln tonnes. However, it isuncertain if 2018 full year imports will exceed the 2017 volume, following the introduction of coal import restrictionsand signals by the government to keep imports for the year below 2017 levels.

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China - Annual Coal Imports by Type(source: customs ; includes steam coal, coking coal and lignite ; in million tonnes)

Lignite Coking Steam

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Indonesia and Australia dominate coal exports to China, accounting for 45 percent and 29 percent respectively of China’simport volume in the first 11 months of 2018. Indonesia is the main source of lignite, and Australia of coking coal andsteam coal.

Indonesia45%

Australia29%

Mongolia12%

Russia10%

Philippines2%

Canada1%

U.S.1%

Others0%

China - Sources of Coal Imports in Jan-Nov 2018(source: customs data ; includes coking coal, steam coal, and lignite; % of import volume)

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esChina - Coal Imports by Source

(source: customs data ; includes coking coal, steam coal, and lignite; in million tonnes)

2016 (1-11) 2017 (1-11) 2018 (1-11)

In the first 11 months of 2018, imports from Indonesia surged 11.7 percent year-on-year to 121.8 million tonnes, mostlyfrom an increase in lignite shipments. Australian shipments fell 2.1 percent to 78.4 million tonnes, largely as coking coalshipments decreased with easing Chinese import volumes.

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In 2017, coking coal imports increased by 17.9 percent to 69.9 mln tonnes as domestic steel production picked up.However, imports appear to have eased in 2018, decreasing by 4.2 percent to 61.1 mln tonnes over Jan-Nov 2018, likelydue to Chinese mills requiring less coking coal as they increased scrap usage in steel making, some inventory run downdue to high coking coal prices in 1Q 2018, and renewed coal import restrictions in November.

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esChina - Monthly Coking Coal Imports - last 36 months

(source: customs data ; in mln tonnes per month)

Monthly Coking Coal Imports

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In the first 11 months of 2018, coking coal imports decreased by 4.2 percent to 61.1 mln tonnes, likely due to Chinesemills requiring less coking coal as they increased scrap usage in steel making, some inventory run down due to highcoking coal prices in 1Q 2018. Coking coal imports may only recover in January following renewed coal importrestrictions in November, as authorities seek to keep the year’s coal import volume below 2017 levels.

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esChina - Monthly Coking Coal Imports - Seasonality

(source: customs data ; in mln tonnes)

2013 2014 2015 2016 2017 2018

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Coking coal prices from Australia have generally been pressured this year as the U.S.-China trade war escalated. This wasfurther exacerbated by the lack of supply disruptions following Cyclone Iris in early April 2018, as well as China’sintroduction of coal import restrictions at certain ports from mid April 2018. However, prices have risen in recent weeksas planned rail and berth maintenance in 4Q 2018 reduced spot availability.

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Australia Coking Coal Prices - last 12 months(source: CME Group ; USD/mt)

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esChina - Coking Coal Imports by Source

(source: customs data ; in million tonnes)

2016 (1-11) 2017 (1-11) 2018 (1-11)

China’s coking coal imports generally fell across the board over Jan-Nov 2018, with imports from top suppliers Australiaand Mongolia decreasing 11.9 percent and 4.3 percent year-on-year respectively, to 27.3 million tonnes and 25.1 milliontonnes.

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In 2017, imports increased by 2.5 percent as domestic demand from the industrial and power sectors remained strong.Over Jan-Nov 2018, China’s imports of steam coal and lignite increased by 13.5 percent year-on-year to 209.4 mlntonnes, due to strong demand in Q1 from a colder than expected winter and gas supply shortages, as well as overallstrong demand for thermal power generation over the year.

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esChina - Monthly Steam Coal + Lignite Imports - last 36 months

(source: customs data ; in mln tonnes per month)

Monthly Steam Coal Imports

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In the first 11 months of 2018, China’s imports of steam coal and lignite increased by a strong 13.5 percent year-on-yearto reach 209.4 mln tonnes, due to strong demand in Q1 from a colder than expected winter and gas supply shortages, aswell as overall strong demand for thermal power generation over the year. Coal imports may only recover in Januaryfollowing renewed coal import restrictions in November, with buyers asked to postpone cargoes already been booked.

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nn

esChina - Monthly Steam Coal + Lignite Imports - Seasonality

(source: customs data ; in mln tonnes)

2013 2014 2015 2016 2017 2018

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Renewed Chinese coal import restrictions in November resulted in a sharp drop in thermal coal prices, which fell to anaverage of USD 100/mt in November. Prices had previously peaked at USD 120/mt in July due to strong demand overthe summer months, and on expectations of shortfalls in domestic coal production.

40

50

60

70

80

90

100

110

120

130

11/2015 05/2016 11/2016 05/2017 11/2017 05/2018 11/2018

USD

/mt

Thermal Coal Newcastle FOB Price - last 36 months(Australian thermal coal ; 12,000 btu/p, 14% ash ; FOB Newcastle/Port Kembla ; USD/mt)

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103.2

43.7

16.2

2.87.1

23.2

108.3

49.1

23.5

7.7 5.5 7.1

121.6

51.1

22.0

8.24.2 2.3

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Indonesia Australia Russia Mongolia Philippines Others

mill

ion

to

nn

esChina - Steam Coal + Lignite Imports by Source

(source: customs data ; in million tonnes)

2016 (1-11) 2017 (1-11) 2018 (1-11)

Over Jan-Nov 2019, thermal coal imports from Indonesia surged 12.3 percent year-on-year to 121.6 million tonnes,while Australian shipments increased 4.1 percent to 51.1 million tonnes. While Indonesian coal have a low calorificvalue, they tend to have lower sulphur and ash content as well, and are thus usually used by Chinese buyers as ablending feedstock with domestic supplies.

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Final Words(summary and conclusions)

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Softer winter pollution control measures due to economic headwinds

This winter, instead of imposing blanket production cuts on heavy industry, the central government has taken a softer stance byallowing local authorities to adopt measures based on regional emission levels. Targets for overall emissions cuts over the winterhave also been revised down, with 28 cities in northern China required to cut levels of PM2.5 by about 3 percent, compared to 5percent in the earlier draft. The more lenient pollution control measures are likely due to the central government reassessing theirpriorities, as they face economic headwinds of slowing domestic demand, rising trade protectionism, and U.S.-China trade tensions.

China falls short of coal production target of 3.7 billion tonnes in 2018

Domestic output in 2018 fell short of their 3.7 billion tonnes production goal due to safety and environmental inspections, with coalproduction over Jan-Nov 2018 only managing an increase of 2.5 percent to 3.2 billion tonnes. In 2019, domestic coal production isexpected to increase by around 100 million tonnes.

Coal import restrictions could limit upside for import volumes in 2019

In the first 11 months of 2018, total coal and lignite imports increased a strong 8.9 percent to 270.5 mln tonnes. However, it is uncertain if 2018 full year imports will exceed the 2017 volume of 271.1 million tonnes, following the introduction of coal import restrictions in November and signals by the government to keep the year’s imports below 2017 levels. China is now also said to be considering monthly coal import controls in 2019, instead of controlling import volumes on an annual basis – a sign that upside in import volumes may be more limited going forward.

Indonesian coal imports surge in 2018, while Australian shipments fall slightly

Over Jan-Nov 2018, imports from Indonesia surged 11.7 percent year-on-year to 121.8 million tonnes, mostly from an increase in lignite shipments. While Indonesia supplies mainly lignite which are of a low calorific value, they tend to be low in sulphur and trade at a large discount to higher-quality thermal coal from Australia. They are thus useful for blending with higher-sulphur domestic supplies – for which China has been increasing production of. On the other hand, Australian shipments fell 2.1 percent to 78.4 million tonnes, largely as coking coal shipments decreased with easing Chinese import volumes.

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