Some Chinese energy providers have been told to stop importing Australian coal amidst trade tensions between our countries, writes Professor John Quiggin.
THE ANNOUNCEMENT that the Chinese Government has ordered a number of State-owned enterprises to stop buying Australian coal should not have come as a surprise to anyone.
China has already imposed a number of trade restrictions in response to political tension with the Australian Government over such issues as the Morrison Government's advocacy of an inquiry into the causes of the COVID-19 pandemic. Although notionally about learning how to improve future responses, the inquiry push was correctly seen as motivated by U.S. President Donald Trump's campaign to blame China for what he has variously called the Chinese virus, the Wuhan virus and "kung flu".
Until now, however, trade measures such as a tariff on imports of Australian barley have been largely of the symbolic variety, designed to create localised harm for influential groups without significantly affecting economic relations. Indeed, exports from Australia to China have been rising so far in 2020, reflecting China's relatively rapid recovery from the pandemic.
To understand China's shift, it is necessary to look at another recent development. In late September, after some years of backsliding on climate issues, President Xi Jinping announced that China would aim to achieve carbon neutrality by 2060.
The move anticipates the likely change of administration in the United States. While Joe Biden would wind back Trump's attacks on trade in general, he has indicated he will apply a carbon-adjustment fee to countries that are failing to meet their climate and environmental obligations. While this policy is applicable to any country without a plan to decarbonise, it is clearly directed at China.
When combined with a desire to promote the consumption of domestically produced coal, this commitment implies a substantial long-term reduction in imports of both thermal and metallurgical coal. That, in turn, makes it feasible to use reduced coal imports as a weapon against Australia.
Coal advocates like Matt Canavan argue that we sell more coal to Japan and South Korea than to China and that export demand from other countries will rise to offset any switch in Chinese demand for imported coal.
But Japan now has only a couple of coal-fired power stations under construction and will probably never build another. Old coal-fired power stations are closing and this will continue for the next decade. Meanwhile, Japanese financial institutions are divesting from coal (and other carbon-based fuels). The latest to do so was Mitsui, which announced last week that it was divesting from coal-fired power plants. That follows similar announcements by Nippon Life, Mitsubishi, Dai-ichi and Mizuho among others. Japan's export finance agency, the Bank for International Co-operation, has been a prominent lender to international coal projects but is now being forced to scale back its activities.
The picture is similar in South Korea, whose government has announced a shift away from coal-fired power for domestic use. Companies like KEPCO, Samsung and Doosan Heavy are still pushing international coal projects such as the Vung Ang 2 power station in Vietnam, but are facing steadily increasing pressure to stop doing so. It seems quite likely that Vung Ang 2, if it proceeds in the end, will be the last major coal project for these corporations.
Despite the Adani Corporation's determination to push ahead with the Carmichael mine, there are no significant prospects for expanded exports to India. Adani's private sector competitors like Tata have all abandoned thermal coal and the government-owned NTPC is moving in the same direction.
Among our existing markets for coal, China is therefore the only one with any realistic growth prospects in thermal coal. The same is true of metallurgical coal used in making steel, where China dominates world production. More importantly, as divestment becomes the norm for financial institutions around the world, China is the main source of significant new finance for coal mines and coal-fired power stations. That includes Australian coal miners like Whitehaven, as well as developments associated with the Belt and Road Initiative.
The longer Australia relies on coal exports, the more dependent on China we will become. The current stoppage of imports will probably pass, but it is a reminder of our uncomfortable position. There is a striking inconsistency between the Morrison Government's strident talk about national sovereignty and an energy policy which undermines that sovereignty.
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