The desolation of China’s smog and what it means for Australia

The Chinese Government’s determination to curb environmental pollution is set to radically reshape the structure of Australia's energy industry.

Beijing’s week of heavy toxic smog last month was unprecedented. The level of choking smog was more than 16 times the safe level considered by the World Health Organisation (WHO). It covered seven provinces and 12 cities in the north of China.  WHO’s representative has described the situation as a crisis. As a result of the nation-wide concern over the problem, it has been high on the agenda at this month’s National People’s Congress in Beijing.

Coal consumption at power stations, steel mills and cement plants has been the largest source of air pollution in the north of China, followed by industrial dust. China’s coal consumption is now at 3.61 billion tonnes. Although China’s domestic coal production was 3.7 billion tonnes last year, net imports of coal was 320 million tonnes, a substantial proportion of which was coking coal or metallurgical coal for use in iron-making with blast furnaces.

The Chinese Government’s determination to curb environmental pollution will have a far-reaching impact on the Australian mining sector, particularly in the iron ore, coal and uranium industries.

The Chinese steel industry is one of the largest users of coal. According to the World Steel Association, China produced 779 million tonnes of crude steel in 2013, accounting for 48.5 percent of global production. Hebei Province -- which surrounds Beijing -- has over 350 million tonnes of steel production capacity. This has been singled out as a critical source of the ‘smog crisis’.

Beijing’s efforts at environmental protection will see a cap put on further expansion of China’s steel production, and may result in the forced shutdown of many small or medium-sized and inefficient blast furnaces and steel mills. A recent example was the close down of the Guangzhou Steel Company last year.

The difference between cracking down on steel production this time with previous endeavours is that local governments are now held responsible for their environmental results. GDP growth rates are no longer the be-all and-end-all index when appraising the performance of local governments.

All of this could have two major implications for the Australian iron ore industry. Firstly, China’s imports of iron ore will not grow in the future. China imported a total of 820 million tonnes of iron ore last year, 300 million tonnes of which was from Australia.

Secondly, Chinese steel mills will look for higher quality iron ore, particularly those with a high content of iron, less sulphur, moisture and ash as such iron ore can substantially reduce steel mills’ costs in environmental protection and coal consumption. Consequently, the price-gap between high and low quality iron ore will widen which could shape the structure of the Australian iron ore industry in the future.

Cracking down on steel production will also have a substantial impact on coal imports. China imports about 100 million tonnes of coal from Australia. While coking coal imports will be less impacted by Beijing’s new environmental strategy, exports of thermal coal could bear the brunt in the near future.

Thermal coal is used largely for electricity production and supplies about 70 percent of the China’s total electricity needs. In order to deal with reduced coal consumption, China’s new energy strategy will likely focus on boosting nuclear power and LNG. This will substantially increase the demand for uranium and LNG. In this sense, China may follow Japan’s energy policy that uses LNG and nuclear power to gradually reduce its reliance on coal-powered electricity.

Dr Charlie Huang is senior lecturer at RMIT's School of Management. He was Deputy Director of Australia-China Iron and Steel Industry Training Centre between 1990 and 1995.

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