China’s steel, coal curbs a double-edged sword for imports

China’s determination to tackle its choking pollution by cutting steel and coal capacity should be a long-term negative for exporters of iron ore and coal to the world’s biggest commodity importer, but the reality is likely to be far more nuanced.
“We will make our skies blue again,” Premier Li Keqiang told the opening of the Parliament on Sunday. That is an unequivocal statement that gives political impetus to Beijing’s plans to shutter more excess steel and coal capacity.
The policy-making National Development and Reform Commission (NDRC) said in a report to the Parliament that it aims to cut steel capacity by 50 million tons this year and coal output by more than 150 million tons.
These targets form part of an overall plan to cut up to 150 million tons of steel capacity and 800 million tons of coal by 2020. The government also announced it wants to cut energy consumption per capita by 3.4 percent and curb carbon intensity by 4 percent in 2017.
Assuming that the actual capacity closures achieved are in line with the targets, where does that leave imports of iron ore and coal?
For iron ore, much will depend on whether capacity cuts actually result in lower output, or whether production is maintained at above 800 million tons a year, as happened in 2016. Last year, steel capacity cuts were mainly in older, less efficient mills, many of them already offline.
Steel output actually rose 1.2 percent last year to 808.4 million tons, resulting in higher imports of iron ore, as many domestic mines remained shut given the weak prices of prior years.
The rising iron ore price may well tempt domestic mines to re-open, but this is far from certain and may not happen to an extent that would force down imports.
Beijing wants economic growth of 6.5 percent in 2017, slightly down from the 6.7 percent achieved last year, when the target was 6.5-7 percent. But it also appears that the government will again try to emphasize growth in consumption, which may limit demand growth for steel.
With steady steel output a likely best-case scenario for 2017, the possibility of domestic iron ore mines restarting and record high port inventories of imported iron ore, it seems hard to construct a case for the price to continue rallying.
The main positive for imported iron ore is that it is considerably higher quality than domestic output, and therefore requires less coal-fired energy to convert it into steel.
While it is possible to process domestic iron ore to reach levels around 62 percent, a quality common for imported ore, this is a more costly process, which will undermine the economics of re-opening domestic mines.
For coal, quality becomes a factor as well. If the government is successful in cutting coal output, it is likely that power stations, steel mills and other industrial users will have to turn to imports to ensure they have adequate supplies. Imports are also likely to be more competitive as supply restrictions push up the price of domestic grades.
It is possible that Beijing will cut coal output faster than it can arrange alternative power sources, such as natural gas generation for electricity and heating for buildings.
Imported coal could meet some of the shortfall, especially in the industrial southeast of China, which has a lesser pollution problem than the northeast, which is home to the bulk of the steel industry.
Coal imports grew 25.2 percent in 2016 to 255.51 million tons, allowing China to reclaim its status as the world’s biggest importer of the fuel from India. The big winner last year was Indonesia, with a 38.1 percent surge in imports by China, much of that being low-rank coal.
This may be at risk from stricter controls on pollution, although it is likely that Indonesian cargoes will remain popular for blending with domestic supplies.
But it is also likely that higher-grade coal from suppliers such as Australia will see increased demand, especially if China does halt imports from its neighbor North Korea as part of international efforts to contain the isolated state’s nuclear weapons program.
North Korea’s anthracite coal is mainly used for sintering, a stage in steelmaking prior to using the blast furnace and in the manufacture of ceramics. While it would be possible for the Chinese domestic coal industry to replace the 22.5 million tons imported last year from North Korea, it may struggle if Beijing places restrictions on local production. Overall, it is poised to be another good year for coal exporters to China, although in the longer term the picture becomes less rosy as ultimately Beijing appears committed to using less of the polluting fuel.
n Clyde Russell is a Reuters columnist. The opinions expressed here are his own.

Source: Arab News