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China free trade agreement broadly positive for Australian thermal coal: bank

China's lifting of its 6% import tariff on Australian thermal coal within the next two years should increase Australian export volumes and lower those from countries without a free trade agreement with Beijing, Commonwealth Bank of Australia analyst Vivek Dhar said in a report released Friday, June 19.

The Australian bank's report said the signing of a bilateral FTA between China and Australia Wednesday would have broadly positive implications for Australian coal exports.

China has committed to immediately abolish its 3% tariff on hard coking coal imports from Australia and phasing out its 6% import tax on Australian PCI coal over the next three years.

Australian thermal coal is subject to a 6% tariff at Chinese ports that is to be gradually reduced to zero over a two-year period.

"The removal of the import tariffs should improve the competitiveness of Australian coking and thermal coal exports relative to Chinese coal and other major exporters to China [except Indonesia, which has an FTA with China]," Dhar said in the report.

"On the margin, this should translate through to stronger Australian coal export volumes, weaker Chinese coal production, lower coal exports from countries that do not have an FTA with China and lower consumer prices in China for Australian coal," he added.

The 43.7% year-on-year decline in China's imports of Australian thermal coal over January-April reflected underlying weakness in China's resource-intensive industrial sectors, Dhar said.

"Slowing electricity output as China's economy slows, a transition away from heavy industry and a shift in energy mix are driving China's thermal coal demand lower," he said in the report.

Hydroelectricity generation was also playing a greater role in China's energy mix and was another bearish factor for thermal coal import demand, he said.

Other downside risks for Chinese coal imports include rising domestic coal production, supply chain improvements in China and tougher environmental regulations on coal, he added.

China received 22% of Australia's 202 million mt thermal coal shipments in the 12 months to April 30, or 45.3 million mt, according to the report.

Other major consumers of Australian thermal coal exports in the 12-month period were Japan at 39% or 79.5 million mt and South Korea at 17% or 33.6 million mt, it added.

China's demand for imported coking coal has declined in recent months on falling domestic steel output, with total imports falling 24.5% year on year over January-April.

The country imported 41.8 million mt of Australian coking coal cargo in 12 months to April 30, according to the report.

source: http://www.platts.com