China makes a frightening energy shift

Register February 7, 2013 in your diary. That is the day you fully appreciated the new direction China is now taking which will hit the expansion of our coal industry and later may affect other mineral exports.

Because nothing will happen in the next few months, markets will be lulled into the belief that nothing is going to change. In my view the coal industry and its analysts have simply put their head in the sand and do not appreciate what is really happening in China.

In simple terms China's new leadership is taking a different direction and we had better understand what is happening or we will face very high unemployment. Fortunately state governments are starting to understand what needs to be done. Tony Abbott is also waking up.

The first sign of change came last week when China's State Council set a total primary energy consumption target (including renewable energy and transport fuel) of 4 billion tonnes of ''standard coal equivalent'' in the five years to 2015.

With two years of the plan period already used up, the target translates to annual growth in energy consumption of about 3.5 per cent over the next three years, down from 6.6 per cent a year in the five years to 2010.

Then yesterday the implications of that change began to unfold in Business Spectator. I often disagree with Ross Garnaut on climate but on China there are few better observers. Garnaut says that China's demand for our coal and later other mineral products will ease because China is going to put a clamp on its coal usage, as part of the state council decision.

Then Ross's son John Garnaut, writing in Fairfax Media, went further and quoted Jiang Kejun, leader of the modelling team that advised the State Council on energy use as saying that coal consumption would peak below 4 billion tonnes”. That target will be in place by 2015. Then chillingly Jiang said. "there's no market for further development of energy-intensive industry.” If Jiang is right that will affect growth in our iron ore exports because steel making is energy intensive.

The two Garnaut views are summarised in Business Spectator (China flags move away from coal February 6). The coal industry might argue that Australia is relying too heavily on the policy interpretations of the Garnaut family with its ties to climate change.

Indeed the coal industry and its analysts hit back. UBS commodities analyst Tom Price said it was already too late for China to cap coal use at 4 billion tonnes as in 2012 it consumed 4.05 billion tonnes. In essence the coal industry says that because China depends on coal for 80 per cent of its power it can't curb coal consumption without affecting economic growth — It's business as usual.

Of course even now there is a problem with the thermal coal price. According to National Australia Bank's chief economist Alan Oster, Australia produces about 700 million tonnes of thermal coal a year of which about 100 million is produced at a loss. (KGB: Alan Oster and Tim Toohey, February 1).

And to keep up the price pressure US coal producers who are being replaced by low cost gas are looking to compete with Australia in Asia (Aust coal sector says it can compete with US in Asia February 7)

If you have any doubt about the pent up demand for change in China look at the news items on Beijing pollution. And to understand what has been happening you need to take a few minutes to read John Lee's remarkable comment in Business Spectator (China can't grow out of its problems, February 6).

After you have taken the time to absorb that commentary you will understand that in Australia the long term changes will be just as dramatic as they are going to be in China.