Australia's coming coal firestorm

China's shift in energy generation is bad news for our coal exports, but a whole new relationship is set to develop if Australia is prepared to embrace the new paradigms.

The Australian business community at the ADC Hayman Leadership Retreat received a deep shock from China. 

It was announced that by 2020, all of Beijing’s electrical power will no longer be generated by coal. That would signal the gradual elimination of China’s coal power generation over the next two decades. 

That announcement came despite the major investments China is currently undertaking in clean coal power generation. 

Beijing would get its new power from gas, particularly gas from Russia. Australia was also warned not to expect big increases in iron ore sales to China as the Chinese reorient their growth patterns towards greater consumer consumption. 

But the Chinese urged Australia not to despair. While our steaming coal exports might decline, the fact that Australian coal is so much cleaner than Indian and Chinese coal should hold up the market.

However, a whole new relationship is set to develop if Australia is prepared to embrace the new paradigms.

China set out what it is looking for from Australia and its vision was remarkably similar to that of Australian Trade Minister Andrew Robb.

In particular, the Chinese are very anxious for Australia to substantially increase production of beef, dairy and grains -- particularly organic grains.  

Just as air quality has become a key issue for the Chinese (leading to the cessation of Beijing’s coal power), food quality and security are also major issues. Many of China’s food-growing areas are polluted and Australia is seen as a vital source of better-quality food. Of course, the Japanese are also looking at Australia for beef and other food.

The recent Japan-Australia free trade agreement is aimed at getting better agricultural access for Australia. China hopes there will be increases in food production from northern Australia. There is no doubt that there is almost unlimited capital and, if Australia wants Chinese migration to help in the process, it will be available.  

China will be urging Australia to set up a special economic zone in northern Australia and, even if that does not take place, the opportunity to replace coal and iron ore growth with agriculture was firmly placed on the table at Hayman.  

The second big growth opportunity for Australia from China is tourism. The Chinese say their people love Australia because they are treated in a friendly fashion here. There are some 100 million Chinese who go abroad each year, but Australia only receives about 700,000, or 0.7 per cent. We should aim for a much higher percentage. At the same time, the numbers of Chinese going abroad will skyrocket.

It is an unparalleled opportunity for Australia and all states can benefit. China is also looking to Australia for medical services and education -- again a huge market.  But Australia will first need to understand that the resources game has changed. 

I first alerted Australians to this change in February 2013 (China makes a frightening energy shift, February 7, 2013) and my warnings were not taken as seriously as they should have been. And now at Hayman, it was there for all to see.

Finally, Australia will need to address the domestic gas shortage in the eastern states. Australia has exported too much gas and there is not enough for local demand. There will be strong pressure for those holding gas reserves to either develop them or lose them. But as China replaces coal with gas, we will see increases in the market.

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