The Chinese government’s National Development and Reform Commission published new interim regulations on 16 September 2014, which will take effect from 1 January 2015. The stated purpose of these new regulations is to implement the State’s “air pollution prevention plan” by restricting the import, sale and burning of low grade coal – with caps on ash and sulphur content in particular.

Generally, in relation to imports, coal with an ash content of more than 40% and a sulphur content of more than 3% will be banned. More stringent rules will apply to the sale and use of coal in areas most affected by air pollution including the Pearl River Delta, the Yangtze River Delta, Tianjin, Hebei and Beijing, where the applicable ash and sulphur contents will be limited to 16% and 1% respectively.

Other limitations will be imposed on the import and use of lignite containing ash of more than 30% and sulphur of more than 1.5%, and on coal with chemical contents such as mercury and arsenic.

The Chinese government announced the move as a means of reducing the levels of pollution in its cities and addressing the mounting public concern about the environment.

Coal accounts for 65% of China’s source of energy. Approximately 7% of this is imported, a large proportion of which comes from Australia and Indonesia.

Commentators estimate that Australian coal producers will be particularly affected by the new targets, as the country exports an estimated 49 million tonnes of thermal coal to China annually. This is said to contain, on average, 25% ash. Indeed, according to some sources, 80% of the coal exported to China in 2013 exceeded the new ash limit. It may be that some coal producers will be able to meet specifications by washing the coal or by blending high ash and sulphur coal with other coal but this is likely to affect their pricing.

Indonesian coal exports, on the other hand, may not be affected to the same degree - the ash and sulphur content of their coal is reportedly typically less than 10% and 1% respectively. Potentially, should Australian producers be forced to wash or blend their coal (and as a result increase their price), demand for cheaper compliant coal from Indonesia may increase.

The Coal Industry Department (and other similar departments) have been named as being responsible for the implementation and supervision of the measures. No doubt further and more detailed provisions will follow, including details of the consequences of non-compliance. According to the regulations, the quality of imported coal will be analysed and reported to the State Quality Supervision Testing Quarantine Department every six months.

Comments

The impact on the environment, economy and coal producers is still unclear, and many question the efficacy of the new regulation, particularly with regards to the reduction of emissions.

These regulations will inevitably affect many long-term coal supply contracts – there will no doubt be instances where previously acceptable coal will be prohibited for import from January. Coal producers with a market presence in China will need to conduct an immediate review of their contracts to assess the impact of this regulation on their business and begin to consider cost-effective solutions prior to the regulation coming into force on 1 January 2015.