Imagine you live in a village where one very large and powerful family both farms and eats half of the grain, and has massive tracts of unused, fertile land. Is the grain business one you would want to get into?
This is roughly the situation the world’s coal producers find themselves in with China, far and away the world’s largest producer and user of coal, and which has been struggling with excess capacity at home for nearly half a decade. After warping global coal markets with ill-timed supply curbs last year, China is now poised to curtail coal imports.
That could be bad news for commodities companies, particularly trading firms.
The extent of the curbs remains unclear. Chinese state-owned media on Wednesday said many of China’s small or midsize ports were already refusing imported coal shipments, although major ports appear to still be open. Even so, prices are already reacting: Asian benchmark coal futures are down about 4 per cent over the past 10 days, while Chinese domestic prices have risen 2-4 per cent.
The Chinese authorities appear to be targeting dirty, low-quality coal with the import limits. State media said regulators wanted any benefit from its “supply side reforms” — that is supply curbs — to remain in China. Translation: higher coal prices and profits at home, not abroad. The Chinese coal sector is a major employer and a big source of bad debt, making its health a matter of national concern.
Among commodity-producing nations, Indonesia will be the biggest loser. It sent piles of low-quality coal into China late last year after China restricted its own mines’ output. But coal traders like Glencore and Noble could also be vulnerable: Noble’s misreading of the market after last year’s Chinese supply cuts is one reason the firm is now staring into the abyss.
More generally, China’s cavalier attitude towards the global consequences of its domestic policymaking for industries it dominates — think steel, shipbuilding, solar panels and, increasingly, oil refining — shows the danger of getting involved with any sector that China decides is strategic.
China’s environmental worries are real, and firms like Glencore may be smart to eye high-quality deposits like the ones it is currently bidding to buy from Rio Tinto — which could pass muster with customs in both China and Japan — if they want to stay in the coal business. Yet being in coal to begin with is a risky proposition these days: not just because of political risk related to climate change, but because of unpredictable Chinese regulators.
A US Treasury secretary once said the US dollar was “Our currency but your problem”.
China is essentially the Federal Reserve of coal — everyone else is just a price-taker both as a buyer or seller. For any business, that’s an insecure position to be in.
By NATHANIEL TAPLIN
The Wall Street Journal