The China Factor in Coal Pricing –
Implications for imported Coal in India
19th November, 2012
Hotel Ashok, New Delhi
Ashish Gupta, Associate Fellow,
Observer Research Foundation
The China Factor
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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
The Global Coal Market – Some key Facts

80 % of the Coal imports just from the 6 countries
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40% of the coal exports is controlled by 9 countries
Coal market is global and increasingly liquid
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Australia, Indonesia, Russia, USA, South Africa & Colombia
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
Global coal prices will be volatile
China importer or exporter?
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MIT study concludes that China will be cost minimiser

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Can be a buyer or seller depending upon the price relationships
China’s coal reserves are in the northern and western part
of china
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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
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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
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Until 2009, the price differentials between domestic and imported coal in
China favoured domestic coal.
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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.
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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
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In 2008, CIF price for Australian coal was higher by about $65/ tonne
compared to Chinese coal.
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
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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.
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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
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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 201617 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
Major coal
price indices (USD / metric ton) & Chinese net imports in
Million metric tons
200
195.1, 2010
140
147
160
133
120
119
138.9, 2009
USD / Metric ton
180
118
140
119
119
100
84
80
86.3
80
91.1
89
87
81.71
86.3
120
90.1
90
100
81
60
58
55
45
52.5
40
53
47 39.5
42, 2006
35
39.5
28.9, 2005
63
62.2
53
52.4
20
80
71
56.2, 2007
60
40
44.5, 2008
34.5
20
0
0
2005
2006
Chart Prepared by ORF
2007
2008
Australia
2009
China
2010
Russia
2011
Indonesia
2012
Million metric tones (Unit for red line only)
160
Dry FOB rates to Guangzhou Port (GZO) in China
40
Australia
To GZO
36
35
30
China
internal
shipping
to GZO
Indonesia
to GZO
USD / Metric ton
28
25
20
20
18
16
15
13
10
5
10.3
8.5
16
14
12.5
12.5
12
11
9
6
5
3
2
0
7
10
9
8
10
7.5
6.5
Russia to
GZO
Why China will Enter and Exit Repeatedly
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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
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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
For any query
Contact at
ashishgupta@orfonline.org
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