February 12, 2015
Distressed Coal News
Recently there has been much speculation about the Chinese coal market especially in view of the U.S./China agreement to reduce carbon emissions. This article discusses the near and medium term outlook for Chinese coal sales and whether the concerns about such activities are overblown.
While it is beyond dispute that China is the world’s largest producer and consumer of coal, there have been repeated predictions that China’s use of coal will substantially decline during the next decade as environmental concerns have been getting worldwide attention. That China should be a prime target of these concerns should be no surprise since China produces and consumes almost as much as the rest of the world combined. Indeed, a recent survey found that China accounts for 46% of the world’s coal production and 49% of consumption. To put this in context, China produces nearly four times as much coal as the second largest producer, the United States. As such, it should not be surprising that coal accounts for approximately 70% of Chinese energy consumption and this use has held steady, if not increased, during the last 30 years.
With huge reserves of coal and countless coal-fired energy plants, it is unrealistic to ask China to forego the large scale use of coal even in the face of international pressure. China has attempted to blunt criticism by announcing plans to build as many as 50 industrial plants to convert coal into synthetic natural gas and to convert its coal energy plants to use this natural gas notwithstanding its limited natural gas reserves. China already has two such plants in commercial operation. Whether this initiative will be successful is uncertain as coal gasification results in more carbon dioxide than a coal plant and synthetic natural gas emits seven times more greenhouse gases than a coal plant.
The much publicized United States/China agreement on climate change offers very limited constraints on China’s use of coal. China has agreed to impose peak limits on carbon emissions to take effect by 2030 with a promise to increase non-fossil fuels’ share of energy to approximately 20%. Like earlier pledges by the international community, there are no enforcement mechanisms built into the agreement.
Consistent with aspiration butting up against reality, China has announced that it will limit its dependence on carbon emissions but delayed meaningful reductions deep into the next decade, although China has announced a goal of limiting total coal production to 4.2 billion tons by 2020. Moreover, the Chinese government has ordered several cities and localities to formulate plans to reduce coal consumption in an attempt to improve air quality, which has reached dangerous levels of toxicity. While these goals sound impressive, China has repeatedly failed to meet environmental goals set in the past and there are no known penalties for such.
Shortly after announcing its decision to limit the use of coal to improve air quality, China exempted the consumption of low quality thermal coal for use in power plants and utilities from this directive. These industries account for roughly half of all coal consumption. Moreover, as American exports to China are largely thermal and metal coal, it appears that such exports will be largely unaffected in the near-term.
Notwithstanding these limitations, China is making efforts to cut coal consumption although those efforts have been spotty and carefully tailored so as not to seriously affect its industrial capacity or efficiency. While the Chinese Constitution, Article 26, requires that “the state protects and improves the environmental in which people live and the ecological environment” the implementation of these goals has been imperfect since it relies on local governmental officials to enforce State policies. Local officials have not been cooperative in enforcing China’s environmental laws and regulations currently in effect in order to achieve a higher rate of economic growth, which is often a gauge of an official’s effectiveness. As Zhou Xizhou, director of the energy consulting firm IHS CERA in China, stated, presently “Eighty percent of the coal fired units in the country have sulfur scrubbers.” But Zhou added that, “Whether people run them is another question.” There are indeed regulations and equipment already in place and some experts say China’s pollution problems could be reduced and the problem of decreasing the environmental impact of coal may be one less of technological innovation and more of education and local resistance. According to Hu Tao who directs the China program for the World Wildlife Fund, on a recent visit to a coal fired energy plant he was told that the installed scrubbers were turned off for “inspection.” When he asked how often these inspections took place he was told “if no one from the government was visiting ‘every day.’” China has pledged to deal with local resistance and improve use of available technology in the future.
Even with the world’s attention increasingly focused on protecting the environment, it is an indisputable fact that China will be relying on coal for the majority of its energy needs for decades to come. In fact, the great majority of energy generating plants being constructed at present require the use of coal. It has been estimated that between now and 2040 China will double the number of coal fired plants. As one fuel analyst has observed, “coal is too low cost, too plentiful and too available from reliable sources to be replaced.” This is especially so in a society that often judges itself on economic growth. In addition, China is a major producer of steel and the processes used in its manufacture require coal in the form of coke. Presently, there is no practical substitute for steel making.
While China has often been singled out as a major user of coal-created energy, the majority of industrial countries rely upon and will continue to rely upon coal. For example, Germany, which often touts its building of solar and water facilities as an alternative to coal, less vocally fails to note that in 2013 it put into use more coal fired facilities than any time in the last decade.
Given the above facts, what can realistically be expected from China regarding the import and use of coal in the next five years? Recent claims that China’s demand for coal has slowed during the last few years since a large portion of this slowdown can be attributed to slowing economic growth and lower utilization of its economic base may not materialize. A more promising development is China’s leading development and use of state-of-the-art scrubbers in new energy generating plants to capture carbon emissions before they are discharged into the atmosphere. To the extent the use of scrubbers becomes widespread and are actually utilized in local plants where, to date, there has been resistance, it may lessen the outcry against the use of coal. Moreover, as China gradually shifts from an industrial to a service economy, the per capita energy demand may lessen. However, based upon past experience and despite genuine effort by the Chinese government, it is unlikely China will favor the environment over economic growth—a growth that will continue to be fueled by coal.
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