South Korea's adoption of an annual sulfur limit of 0.4% as-received basis for thermal coal used to fuel its coal-fired power plants could radically change the Asian country's demand profile for imports, according to market sources familiar with the move.
Power plant operators in South Korea, including the five state-owned generators, will have to comply with the new sulfur limit from July, and earlier than the originally thought date of October, sources said.
Financial penalties will be applied to power plant operators that exceed the 0.4% sulfur limit, which will be measured on an average basis per calendar year across import deliveries to individual plant operators, they said.
The lower sulfur limit has taken immediate effect, however, as power utilities in South Korea have already published tenders for the purchase of imported thermal coal that specify low sulfur thermal coal.
Blended cargoes are no longer a viable option for importers, as it is difficult to measure their sulfur content on a consistent basis throughout a shipment, sources said.
The first end-of-year sulfur assessment is to be carried out for the period July to December 2018, sources said.
The lower sulfur limit will likely lead to South Korean generators importing more, lower sulfur fuel from countries such as Colombia, Indonesia and Russia, sources said.
"We expect demand for 4,200 kcal/kg GAR coal with low sulfur [0.2-0.3%] will increase for Korea," said one market source.
"More Colombian, South African and Russian will be needed to bring down the sulfur [of imports]," he added.
As a result, there could be a shift in Korea's generating fuels sector away from Australia which has relatively few suppliers of thermal coal with sulfur of under 0.4%, sources said.
Australia shipped 31 million mt of thermal coal to South Korea in 2017, and this volume is expected to reduce starting this year, said one source.
An added complication to the low sulfur regulation is South Korea's consumption tax for imported thermal coal.
The tax is applied at different rates to three bands of calorific value thermal coal starting at Won 27,000/mt ($24.90/mt) for coal with a calorific value of less than 5,000 kcal/kg, Won 30,000/mt for 5,000-5,500 kcal/kg coal, and Won 33,000/mt for 5,500 kcal/kg and above.
The tax incentivizes the importation of higher calorific thermal coal, as it works out cheaper on a per metric ton basis compared to lower calorific value coal, said sources.
A pressing issue for importers, is that Indonesian low sulfur thermal coal tends to be lower too in calorific value, meaning that more needs to be imported in volume terms compared with higher-CV material.
Russian thermal coal shipped from the country's Pacific seaboard is higher in calorific value, and low in sulfur at around 0.3% as-received, but it can be relatively "expensive", said sources.
Higher demand for Russian thermal coal could lead to congestion at its Pacific ports which have limited capacity to store stock, and have been prone to logistical and rail problems, they added.
In the 2017 year, 109.5 million mt of seaborne-traded thermal coal was shipped to the Asian country, an increase on 93.08 million mt in 2016, according to import data for South Korea.
Meanwhile, Seoul is to repeat its temporary closure of several older power plants over April-June 2018, after the government ordered operators to take offline eight coal plants at the same time last year, sources said.
Five generating units in total will be idled for the off-peak season pollution control measure, including two units in the 4,000 MW Boryeong plant, and two in the 3,240 MW Samchonpo plant, plus a single unit in the 325 MW Yeongdong plant.
President Moon Jae-in of South Korea announced shortly after his inauguration last year that he wanted to close by 2022 a number of coal-fired power stations older than 30 years, and to also suspend the construction of new plants fueled by thermal coal.