the china factor
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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 - PowerPoint PPT PresentationTRANSCRIPT
The China Factor in Coal Pricing – Implications for imported Coal in India
19th November, 2012Hotel 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 2nd 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 2008-09
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
2016-17 with most of it going towards China.India will have to choose between no coal and unaffordable coal.
Major coal price indices in (USD / metric ton) & Chinese net imports in Million metric tons
52.5
39.5
53
86.381.71
87
119
90
52.447
53
86.381
118
133
147
55
45
58
8480
89 91.190.1
119
35 39.5 34.5
62.2
71
63
119
0
20
40
60
80
100
120
140
160
2005 2006 2007 2008 2009 2010 2011 2012
USD
/ Met
ric to
n
Australia China Russia Indonesia
20
80
0
100
40
120
140
160
180
Mill
ion
met
ric
tone
s (U
nit
for
red
line
only
)
Chart Prepared by ORF
60
200
42, 2006 44.5, 2008
195.1, 2010
138.9, 2009
28.9, 2005
56.2, 2007
Major coal price indices (USD / metric ton) & Chinese net imports in
Million metric tons
20
36
28
5
12.5
16
10
13
18
14
67
910
8.5
12.511
2
78
6.5
10.3
16
12
3
910
7.5
0
5
10
15
20
25
30
35
40
US
D /
Met
ric to
n
Dry FOB rates to Guangzhou Port (GZO) in China
Australia To GZO
China internal shipping to GZOIndonesia to GZO
Russia to GZO
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
Thank you
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