China will spoil Australia's energy equation

Sometimes it can be frustrating when your writings move ahead of the game. And so two weeks ago, along with others, I alerted Australia to the new direction China was taking which will hit the expansion of our coal industry and later may affect other mineral exports (China makes a frightening energy shift, February 6).

The markets took no notice but now they are starting to understand that what is happening in China is important. At the same time I have done more research via my China contacts so I can take the story a little further.

You will remember that the initial details of the China direction change came from economist Ross Garnaut and then from his son John writing from China for Fairfax Media (China flags a move away from coal, February 6).

In essence the Garnauts told us that China would cap coal usage around 4 billion tonnes and Australia should expect tougher times in the coal industry. Coal industry analysts retorted that such a cap would be virtually impossible because China's coal demand was already almost at that level. Given that coal provides about 80 per cent if China's power there would be widespread disruption and unemployment. In a sense I now believe both were right. There will be a cap on coal but it is more likely to be around 4.5 billion tonnes, which will limit the immediate effect on the economy.

My guess us that China will creep over the cap but what is more important is that we are looking at a change in China's direction and Australia is in the front line of those likely to be affected.

That change in direction involves lowering the concentration on energy intensive industries and lifting deposit interest rates so that savers get a better income and the highly leveraged state owned enterprises have less money to develop energy intensive projects.

Over time, China is planning to lift its consumer spending which will create a different demand pattern. High interest rates will boost consumer fortunes because the Chinese are huge savers.

Furthermore, add to the list of changes the increased supply of energy which will come from the massive developments in the US and the Middle East, and in a few years we will look back at the recent peak prices with wonderment.

That means that high-cost coalmines and those LNG projects that have massively over spent will face hard times in future years.

And it also means that Australian tax revenue maybe less than we hoped for.