China Trade Pact Set to Deliver Relief for Australian Coal Mines

By James Paton  

A free trade agreement with China, the world’s biggest coal consumer, is set to bring some relief to struggling producers in Australia.
China is expected to exempt the miners from import tariffs as part of the new trade accord, according to HSBC Holdings Plc. Chinese President Xi Jinping is scheduled to address Australia’s parliament in Canberra today when the agreement is scheduled to be announced.
The removal of the tariffs, designed to protect struggling Chinese mines, will help bolster margins of producers in Australia, the biggest coal exporting nation. A global glut and slowing demand growth have depressed prices, forcing companies from BHP Billiton Ltd. (BHP) to Glencore Plc to cut costs.
“For the coal space, there’s a good chance it will
mean that the tariffs recently announced by the Chinese won’t apply to Australian exports of thermal coal,” Paul Bloxham, chief Australia economist at HSBC in Sydney, said in a phone interview. “That will be important.”
Two-way trade, which reached A$151 billion ($132 billion) in 2013, has been driven by China’s insatiable appetite for resources and energy, while Australia mainly buys Chinese manufactured products.

‘Big Deal’

Glencore, the world’s biggest exporter of power-station coal, said last week it will stop production at its Australian mines for three weeks as prices languish at a five-year low.
China planned to impose an import levy of as much as 6 percent on coal starting Oct. 15, including 3 percent on coking coal, according to a Finance Ministry statement.
The price of energy coal from Australia’s Newcastle port, a benchmark for Asia, is down 27 percent this year to $61.85 a ton, the lowest since 2009, according to McCloskey.
A trade agreement would benefit Australia’s agriculture and services industries in particular and lead to an increase in Chinese investment in the country, Bloxham said.
“This is big deal,” he said. “We think it’s going be a support for growth” in the Australian economy.
The potential good news for the industry from the free trade accord is offset by negative implications from the recent agreement between the U.S. and China on new cuts to greenhouse gas emissions to fight climate change.
The coal relief is “a minor win at a time when you’re facing significant headwinds,” Phillip Chippindale, a Sydney-based analyst at Wilson HTM Investment Group Ltd., said by phone.
The U.S. and China deal on emissions will be more significant for the resources industry, said HSBC’s Bloxham.
“That’s not a particularly positive story for coal, but a much more positive story for gas and potentially for uranium,” he said. “That may be a bigger deal than a free trade agreement in terms of impact on the energy export sector.”