Coal sector: Possible curb on imports may provide brief relief

May 27, 2013, 2:41 pm | Admin

Source: Bloomberg

Analyst: Cho Fook Tat (ft.cho@htisec.com)

It has been rumored that the National Energy Administration is seeking advice from the industry in relation to the plan to restrict imports of low quality coal. According to the rumor, the imported coal should meet the following standards: 1) heat content of greater than 4,544kcal/kg; ash-content of lower than 25%; and sulphur content of less than 1%. The possible plan also targets to set the entry threshold for coal importers. It is still at a preliminary stage and the NEA needs to seek opinions from various industry participants, such as major coal importers, like China Shenhua Energy (1088 HK, BUY).

The possible plan is sensible and logical, in our view, as it coincides with the country’s emphasis on increasing awareness of environmental protection through helping reduce the emission of air pollutants from the combustion of low quality imported coal. It is estimated that the amount of coal that fails to meet the threshold amounted to about 50mn tonnes in 2012, which represented about one fifth of total coal imports last year or 1-2% of the total coal consumption in the same year. As such, an eventual implementation of the rumored restriction may provide a moderate relief to domestic coal producers in the sense of lesser competition from the influx of coal imports, which has caused the oversupply situation the coal industry currently faces.

After a lackluster start to the year as coal prices struggled to lift from depressed levels while macro conditions remained challenging, and as thermal coal spot prices (Qinhuangdao 5,500kcal) continued its weak trend and have hovered at a low level so far this year within a narrow range of RMB610-620/tonne since the start of the year, we believe the crux for any rebound hinges on any concrete supportive policy that can help economic growth pick up more noticeably, a deciding factor for power consumption and coal demand ahead.

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