Prudence Required in Limiting Coal Imports

By+Lan+Xinzhen

Recently， the news that the National Development and Reform Commission （NDRC） will soon release provisional management rules on coal quality has sparked discussions in the market. According to a draft the NDRC has issued for public consideration， the country will limit imports of coal with heat value below 4，554 kilocalories， sulfur content higher than 1 percent or ash content above 25 percent. The policy remains to be discussed. With regard to resource commodities， it is arguable that the markets rules should be followed.

The most important reason for the NDRC to limit coal imports at this time is that Chinas coal market is in a state of depression， and domestic coal companies are urging the government to restrict imports.

Since 2012， the domestic demand for coal has been weak， and coal prices have declined dramatically. According to figures from China Competition Information Center， the growth of sales revenue in the coal industry has hit rock bottom over the last 15 years. Its profit rate stands at 5.1 percent， the lowest in the last decade. At present， coal prices are almost level with their cost price， much lower than coal companies need to operate on a profitable basis. About 80 percent of coal companies are now suffering losses. It is true that cheap imported coal is a major factor underlying the downturn in coal companies fortunes. But limiting coal imports for this reason is obviously contrary to the market economy principle of fair competition.

In 2013， 12 percent of Chinas coal demand was satisfied by imports， and in the first quarter of 2014， Chinas coal imports rose 5.1 percent over a year previous. It is clear that imported coal does not as of yet enjoy a market share sufficiently large to affect prices in Chinas coal market. There are two reasons for the current depression. Influenced by economic restructuring policy implemented by the Central Government， Chinas growth began to be purposefully slowed down in 2010. The demand from major coal consumers has declined. Take power plants for instance： In 2013， daily coal demand from the countrys key power plants stood at 3.34 million tons， a decline of 6.39 percent from the previous year. On the other hand， the countrys production capacity of coal has soared owing to fast-growing investment between 2002 and 2012. The countrys production capacity of coal totaled 5 billion tons in 2013， but the needs of the market only extended to 4 billion tons. In addition， coal exports have almost ground to a halt owing to the global recession. It is an economic rule. It would be naive indeed to think that merely limiting coal imports will revitalize the stagnant coal market in China.endprint

There is another reason for the NDRC to limit coal imports： to control air pollution， which is why some people support the policy.

Air pollution in the last two years has been a source of anxiety for the Chinese Government and people. But that still doesnt mean it makes sense to restrict coal imports. The extensive use of coal in economic activities is the major reason for air pollution， and this has little to do with whether the coal used is imported or domestically produced.

Most of the coal imported is used by power-generating， coking and steel companies in southeast China， and comes mainly from Australia and Indonesia. For coal users in this region， imported coal is 20 percent cheaper than the coal transported from the inland areas. The decision of whether to use imported or domestically produced coal should therefore be left with these companies.

If imports of coal with the aforementioned values are limited， this raises the question of whether or not the domestically produced coal that fails to meet the same requirements should also be stopped. In fact， many coal producers in China would not be able to feasibly meet these standards， while according to China Competition Information Center statistics， only 0.7 percent of imported coal in 2013 fell below these specifications.

In China， the per-capita available resources are insufficient， and thus imports of resource products should be encouraged instead of restricted. Besides making Chinas coal industry more market-oriented， importing coal could even conserve domestic resources. When formulating policies， the NDRC should not only consider the interests of coal companies， but also those of thermal power plants and other coal users as well as the countrys overall energy security. China is a member of the WTO. If the prices of coal imported from other countries do not constitute dumping， the setting of standards by the government may in fact violate WTO rules.

In mid May 2013， the NDRC organized a discussion regarding coal quality management rules. Power plants and some market experts were strongly against new regulations. This makes perfect sense. The government should not intervene in the market economy using administrative measures. When the Chinese economy improves and the demand for coal increases， or indeed if the self-adjustment in the industry is undertaken， Chinas coal market will naturally rise out of its present mire.endprint