china coal & power outlook - banchero costa10 percent until 2020, while the yangtze delta region...

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Jul 2018 – 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)

July 2018

bancosta blue studies – volume China 2018/#11

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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 consumption from 1.41 billion tonnes in 2000 to 4.24 billion tonnes in2013, coal consumption declined over 2014-2016. This was in spite of continued increases in total energy consumption and overallelectricity generation.

Such declines were partially due to the ongoing slowdown in the country’s economy, but most importantly due to the ongoingrestructuring of the economy, and the shift towards high-efficiency, cleaner burning technologies, as well as renewable energy.Clean energy consumption from hydro, wind, nuclear, and natural gas has been increasing, accounting for 20.8 percent of totalenergy consumption in 2017, compared to 18 percent in 2015.

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

This remains in line with China’s 13th five-year plan, which sets out ambitious targets for their energy mix by 2020 as they seek toreplace coal with cleaner fuels to help cut pollution: Coal’s share of overall energy consumption should fall below 58 percent by2020 (from 64 percent in 2015; had already fallen to 60.4 percent in 2017). Gas’ share is targeted to increase to 10 percent (from5.9 percent in 2015; reached 7 percent in 2017). Non-fossil energies should increase to 15 percent (from 12 percent in 2015;reached 13.7 percent in 2017). The plan further stated that energy intensity – the energy consumption per unit of GDP – would becut by 15 percent from 2015 levels. In 2018, China targets to lower its energy intensity by 4 percent year-on-year, as well as boostgas’ share of total energy consumption to 7.5 percent in 2018, while pushing down coal consumption to 59 percent.

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Pollution control measures to dampen coal use; winter restrictions to return

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.

Special anti-smog measures will also be introduced over autumn and winter again this year, although each of the 82 cities will nowbe allowed to draw up their own implementation plan. 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 cement through 28 northern cities.

The plan also mentioned that gas storage capacity would be raised to ensure sufficient supplies during winter. Over the last winter,Chinese authorities had been forced to relent on a policy banning the use of coal to heat homes as gas supply turned outinadequate.

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 almost three-quarters of China’s total power generation in 2017, of whicharound 90 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 has continued to increase by a strong 7.8 percent year-on-year to 2,375 TWh in the first half of 2018.

However, gas power generation has been picking up more strongly, with the China Electricity Council estimating that gas powergeneration increased 12.8 percent year-on-year in 2016, versus a 1.2 percent growth for coal power generation. Gas powergeneration also saw double digit growth in 2017, especially as China fights pollution by shifting both industrial and residential usersfrom coal to gas usage.

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Coal power capacity being actively reduced

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. Otherinland provinces such as Ningxia and Hubei also appear to be increasing thermal power capacity.

In 2017, China reported eliminating or suspending 65 GW of coal-fired power capacity, exceeding the national target of 50 GW. Thecountry aims to eliminate or halt a total of 109 GW of coal-fired power capacity by the end of this decade.

In 2018, China announced plans to continue shutting inefficient coal-fired power generation units with capacity under 300,000 kWthis year.

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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 coal equivalent, mainly as usage of crude oil, natural gas, and non-fossil fuels gained momentum. Coal consumption grew by a minimal 0.4 percent.

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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.

5.6% 7.1% 13.3% 8.7% 4.5% 8.1% 5.7% 2.8% 5.2% 6.2%

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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 half of 2018, electricity output has continued to increase by 8.3 percent year-on-year to 3,184 TWh. After alull in the beginning of the year with the Lunar New Year celebrations, electricity output tends to rise steadily to its peakduring the summer months of July-August.

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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 74 percent of power generation in 2017. According to the China ElectricityCouncil, around 90 percent of thermal power generation are produced by coal-fired power plants.

Thermal74%

Hydropower17%

Nuclear4%

Wind4%

Other1%

China Power Generation by Source - 2017(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.

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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 a generally flat growth in 2014-2015 as hydro and other alternative power output expanded, thermal poweroutput has since picked up over 2016-2018. While gas-fired power plants still form a small percentage of thermal poweroutput, gas power output increased 12.8 percent year-on-year in 2016, versus a 1.2 percent growth for coal poweroutput according to the China Electricity Council.

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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 half of 2018, thermal electricity output has continued to increase by a strong 7.8 percent year-on-year to2,375 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, gas power output has been expanding more rapidly than coal in the push for cleaner energy.

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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 – 2012 v.s. 2017

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 to the east via ultra-high-voltage lines. Other inland provinces such as Ningxia and Hubei also appear to be increasing thermal power capacity. Coastal provinces Shandong and Jiangsu remain as key areas of thermal power output.

2012 2017

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

> 3,000 TWh

Total Power Output

2,000 - 3,000 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 3-7 percent each year between 2015-2017.

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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 half 2018, hydro electricityoutput increased by a slight 0.1 percent year-on-year to 463 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 – 2012 v.s. 2017

The development of hydro power generation in the Sichuan and Yunnan provinces have increased significantly, with output in these 2 areas doubling over the past 5 years. Hydro power output from the Hubei province has only shown a slight increase over the same period.

> 2,000 TWh

Total Power Output

1,000 - 2,000 TWh

< 1,000 TWh

2012 2017

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 morethan doubled since 2011, and now accounts for around 9 percent of China’s total generation, compared to 4 percent in2011.

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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 half of 2018, other sources of power generation, which include wind, solar and nuclear, have continued toincrease by 25.8 percent year-on-year to 346 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. 2017

While generation from nuclear and wind power remain small relative to coal and hydro power, such power generation have been making some headway in Fujian, Guangdong, Liaoning, and Xinjiang. Increases in Fujian, Guangdong, and Liaoning have mainly come from nuclear power expansion, while the increase from Xinjiang came from wind power expansion.

2013 2017

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 targets to increase coal production by 7.3 percent in 2018, but could fall short of goal

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 aims to increase coal output by 7.3 percent to 3.7 billion tonnesthis year. However, as safety and environmental inspections continue, domestic production could fall short of this goal. This couldbalance out the negative impact that pollution control measures have on coal demand and imports. In the first half of 2018, coalproduction has only managed an increase of 3.9 percent to 1.7 billion tonnes.

Elimination of inefficient coal production capacity remain on the agenda

Even as China targets to increase coal output in 2018, elimination of inefficient coal mines remain on the agenda due toovercapacity in the country. The NDRC had announced that 800 mln tonnes of inefficient coal capacity would be cut over 2016 to2020, while adding 500 mln tonnes of “advanced” capacity. The reductions would be concentrated among smaller mines in thenorth-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 aim 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 production increasing 2.4 percent to reach 3.45 billion tonnes. In the first half of 2018, coal production has increased another 3.9 percent to 1.7 billion tonnes. According to China’s National Energy Administration (NEA), China aims to increase coal output by 7.3 percent to 3.7 billion tonnes this year.

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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 – 2017

Chinese raw coal output is concentrated in Inner Mongolia, Shanxi, and Shaanxi, making up around two-thirds of the country’s coal production in 2017. Output from these 3 provinces increased in 2017, in line with government plans to increase coal production at inland provinces. In the first half of 2018, coal output in Shaanxi has continued to increase by a particularly strong 11.4 percent to 294.7 million tonnes.

> 800 mln tonnes

Total Coal Output

500 – 800 mln tonnes

100 – 500 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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Short haul Indonesian & Russian coal imports surging this year

Following China’s ban on North Korean coal imports, overall coal and lignite shipments from Indonesia, Australia, Mongolia, andRussia saw a sharp increase in 2017.

In the first half of 2018, imports from Indonesia have continued to surge, based on vessel-tracking and port data compiled byThomson Reuters Supply Chain and Commodity Forecasts. Indonesian shipments to China was estimated to reach 61.8 milliontonnes or approximately 49 percent of Chinese imports in the first 6 months of 2018, up from 46.3 million during the same periodin 2017. On the other hand, imports from Australia were estimated at 42.84 million tonnes or 34 percent of China’s imports in 1H2018, marginally higher compared to the 42.62 million tonnes shipped during the same period in 2017. While Indonesia suppliesmainly lignite which are of a low calorific value, they tend to be low in sulphur and trade at less than half the value of higher-qualitythermal coal from Australia, and is thus useful for blending with higher-sulphur domestic supplies or imports.

Reuters also reported that Russian deliveries rose a strong 27 percent year-on-year to 10.3 million tonnes in 1H 2018, equivalent toaround 8 percent of Chinese coal imports. Russian coal are of a higher quality than most types of thermal coal used for powergeneration, and are generally used for industrial applications such as sintering and ceramic production, as well as for blending withlower quality coals. In order to serve strong demand in the Asia Pacific market, Russia has also been developing new coalproduction centers in the country’s Far East, as well as improving existing infrastructure connecting coal output located mostly inthe country’s South to port facilities in their Far East.

Long haul U.S. coal uncompetitive in Chinese market; further disadvantaged by Chinese tariffs

U.S. shipments to China have not been faring as well, declining 38 percent year-on-year to 2.09 million tonnes in the first 6 monthsof 2018, amounting to around 1.7 percent of Chinese imports. According to Chinese customs data, U.S. coal exports to China hadsurged to 3.2 million tonnes in 2017, compared to none in 2016.

The U.S. is a swing supplier of coal, with exports to Asia largely dependent on price as U.S. coal typically cost more, take longer toship to Asia, and have a lower quality compared to Australian coal due to their high sulphur content and low heating efficiency. U.S.exports of coking coal also stand to benefit in the Asian market when there are supply disruptions at top shipper Australia.

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However, Australian coking coal prices have generally fallen this year due to a lack of major supply disruptions – a factor that hasmade U.S. coking coal even less competitive in the Chinese market this year. The 25 percent tariff on U.S. coking coal implementedby China is also expected to put U.S. coal at a further disadvantage. The U.S.-China trade war has been escalating, with Chinaimplementing import tariffs on U.S. coal and other energy products in retaliation for Trump administration levies, which came intoeffect on 6 July. The Trump administration has since threatened to slap tariffs on another $200 billion worth of Chinese imports.

Coking coal imports fell in 1H 2018, could be further dampened as steam coal prioritized in summer

In 2017, coking coal imports increased 17.9 percent year-on-year to reach 69.9 mln tonnes, supported by strong demand fromdomestic steel mills: China’s steel output in 2017 increased 4.6 percent to reach 845.0 mln tonnes, with August seeing a recordamount of 74.6 mln tonnes produced. China’s steel mills had been supported by positive steel margins, as steel prices weresustained by ongoing capacity cuts targeting low quality furnaces, and improvements in the construction and industrial sectors.

However, in the first half of 2018, coking coal imports decreased by 19.8 percent to 28.9 mln tonnes, in spite of domestic crudesteel output increasing a relatively strong 7.1 percent to 448.8 mln tonnes. This was likely due to Chinese mills requiring less cokingcoal as they increased usage of higher quality materials, and some inventory run down due to high coking coal prices in 1Q 2018.

Coking coal imports could continue to remain flat, as coal import restrictions imposed have also resulted in Chinese portsprioritizing thermal coal imports to meet summer power demand. Since April 2018, China has imposed restrictions on imports ofcoal at some ports, in order to boost domestic thermal coal prices and production. Platts reported that under current importrestrictions on coal in southern China, authorities at ports such as Fangcheng, Xiamen and Kemen were allocated import quotas forthe year, which were in turn allocated to power plants and steelmakers. But as demand for thermal coal from the powergeneration sector increased with the summer months, there has been less quotas available for coking coal.

For example, at Fangcheng port in southwestern China's Guangxi province, about 4 mln tonnes of coal import quotas arereportedly left for 2H 2018, with coking coal volumes close to being maxed out for the year. In southeastern China's Fujian province,there are purportedly no allocations for coking coal at ports such as Xiamen and Kemen, with priority given to power plants.

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Strong Q1 demand supported steam coal & lignite imports

In 2016, China imported 196.3 mln tonnes of steam coal and lignite, an increase of 25.6 percent, as cuts in domestic coalproduction helped to prop up imports. In 2017, China’s imports of steam coal and lignite continued to increase by 2.5 percent year-on-year to reach 201.2 mln tonnes, supported by demand from the industrial and power sectors.

In the first 6 months of 2018, China’s imports of steam coal and lignite increased by a strong 19.9 percent year-on-year to reach116.6 mln tonnes, due to strong demand in Q1 from a colder than expected winter as well as gas supply shortages. Steam coal andlignite imports are expected to pick up these few months to meet summer power generation demand.

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Until 2008, China was a net coal exporter. However, imports have skyrocketed since then. After a sharp drop registered over 2014-2015, China’s total coal imports increased in 2016-2017. In the first half of 2018, total coal and lignite imports have increased another 9.2 percent to 145.5 mln tonnes.

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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 49 percent and 34 percent respectively of China’s import volume in the first half of 2018. Indonesia is the main source of lignite, and Australia of coking coal and steam coal.

Indonesia49%

Australia34%

Russia8%

U.S.2%

Others7%

China - Coal & Lignite Import Sources in 1H 2018(source: Thomson Reuters ; in % of import volume)

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China Coal + Lignite Imports by Province – 2017

The bulk of China’s coal imports are received via their coastal ports, with Guangdong accounting for around 19 percent of the country’s coal imports in 2017. Inner Mongolia, while not a coastal province, has the second largest coal imports, accounting for another 13 percent of Chinese coal imports.

Xinjiang

Tibet

Qinghai

Gansu Inner Mongolia

Ningxia

Shaanxi

Shanxi

Hebei

Liaoning

Jilin

Heilongjiang

Shandong

Henan Jiangsu

Shanghai

Zhejiang

AnhuiHubei

Yunnan

GuizhouHunan

Jiangxi

Fujian

GuangxiGuangdong

Hainan

BEIJING

Chongqing

Sichuan

> 30 mln tonnes

Total Coal Imports

20 - 30 mln tonnes

10 - 20 mln tonnes

< 10 mln tonnes

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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 the first half of 2018, decreasing by 19.8 percent to 28.9 mln tonnes, likelydue to Chinese mills requiring less coking coal as they increased usage of higher quality materials, some inventory rundown due to high coking coal prices in 1Q 2018, and coal import restrictions implemented since April.

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esChina - Monthly Coking Coal Imports - last 36 months

(source: customs ; in mln tonnes per month)

Monthly Coking Coal Imports

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In the first half of 2018, coking coal imports decreased by 19.8 percent to 28.9 mln tonnes, likely due to Chinese millsrequiring less coking coal as they increased usage of higher quality materials, and some inventory run down due to highcoking coal prices in 1Q 2018. Coking coal imports could continue to remain flat, as coal import restrictions imposedsince April have also resulted in Chinese ports prioritizing thermal coal imports to meet summer power demand.

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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 had been falling in the first half of this year over concerns of lower Chinese steeldemand and production. This was further exacerbated by the lack of supply disruptions following Cyclone Iris in earlyApril 2018, as well as China’s introduction of coal import restrictions at certain ports from mid April 2018.

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

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Chinese imports of steam coal and lignite picked up by 25.6 percent in 2016 as domestic coal output fell. In 2017,imports continued to increase by 2.5 percent as domestic demand from the industrial and power sectors remainedstrong. In the first half of 2018, China’s imports of steam coal and lignite increased by 19.9 percent year-on-year to 116.6mln tonnes, due to strong demand in Q1 from a colder than expected winter as well as gas supply shortages.

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

(source: customs ; in mln tonnes per month)

Monthly Steam Coal Imports

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In the first 6 months of 2018, China’s imports of steam coal and lignite increased by a strong 19.9 percent year-on-yearto reach 116.6 mln tonnes, due to strong demand in Q1 from a colder than expected winter as well as gas supplyshortages. Steam coal and lignite imports are expected to pick up these few months to meet summer power generationdemand.

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esChina - Monthly Steam Coal + Lignite Imports - Seasonality

(source: customs data ; in mln tonnes)

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International thermal coal prices had bottomed out in January 2016 after declining by more than 40% since December 2013. Prices have since increased, reaching a new high of over USD 105/mt at the start of 2018 due to strong winter demand, and over USD 105/mt yet again in May 2018 as demand for electricity in China picked up with the start of the summer months.

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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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Final Words(summary and conclusions)

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Pollution control measures to dampen coal use; winter restrictions to return

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. Special anti-smog measures will also beintroduced over autumn and winter again this year, although each of the 82 cities will now be allowed to draw up their ownimplementation plan. The plan also mentioned that gas storage capacity would be raised to ensure sufficient supplies during winter.

China targets to increase coal production by 7.3 percent in 2018, but could fall short of goal

According to China’s National Energy Administration (NEA), China aims to increase coal output by 7.3 percent to 3.7 billion tonnesthis year. However, as safety and environmental inspections continue, domestic production could fall short of this goal. This couldbalance out the negative impact that pollution control measures have on coal demand and imports. In the first half of 2018, coalproduction has only managed an increase of 3.9 percent to 1.7 billion tonnes.

Short haul Indonesian & Russian coal imports surging this year

Based on vessel-tracking and port data compiled by Thomson Reuters Supply Chain and Commodity Forecasts, Indonesianshipments to China was estimated to reach 61.8 million tonnes or approximately 49 percent of Chinese imports in the first 6months of 2018, up from 46.3 million during the same period in 2017. Reuters also reported that Russian deliveries rose a strong27 percent year-on-year to 10.3 million tonnes in 1H 2018, equivalent to around 8 percent of Chinese coal imports.

Coking coal imports fell in 1H 2018, could be further dampened as steam coal prioritized in summer

In the first half of 2018, coking coal imports decreased by 19.8 percent to 28.9 mln tonnes, in spite of domestic crude steel outputincreasing a relatively strong 7.1 percent to 448.8 mln tonnes. This was likely due to Chinese mills requiring less coking coal as theyincreased usage of higher quality materials, and some inventory run down due to high coking coal prices in 1Q 2018. Coking coalimports could continue to remain flat, as coal import restrictions imposed have also resulted in Chinese ports prioritizing thermalcoal imports to meet summer power demand.

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