China’s Import Restrictions Channels BHP To Japan; PNG- LNG Project To See Green Flag By 2020

China’s Import Restrictions Channels BHP To Japan; PNG- LNG Project To See Green Flag By 2020

China increased stance to pull up the local coal mines has witnessed an official restriction on Australian coal import. The restriction by the Chinese government was designed in a way to encourage the local power stations to procure domestic coal.

As the Chinese domestic coal does not show any price advantage over the Australian coal import, the local power stations were keen towards the outside coal, which in turn, prompted the Chinese government to curb down the import and support the local mines.

In its media publication, the Australian Coal exporter- BHP Billiton (ASX: BHP) mentioned that the total coking coal imports in China went down substantially in 2018 amid safety and environmental concerns.

As per the data, China’s total coking coal import slipped by 7 per cent on a yearly basis and stood at 65 million tonnes in 2018. The Australian coking coal import in China stood at 28 million tonnes in 2018, down by 9 per cent as compared to the previous corresponding year.

On the trade dispute front, China included the United States metallurgical coal under its tariff list.

Despite the restriction of coal imports, the Chinese energy coal import inched up by 8 per cent on a yearly basis in 2018 amid 6 per cent increase in the thermal generation; however, the Chinese government kept on urging the domestic miners to execute more long-term contracts.

The increased stance to promote the domestic coal mines marked a cap on the inbound volumes at 271 million tonnes in China. The capping further lengthened the offloading of shipments and demonstrated a delayed custom clearance in December 2018.

With Australian miner- BHP’s coal facing problems in China, the company decided to produce more of a coal specification demanded by Japanese Customers.

As per the market consensus, Chinese restrictions would not diminish anytime soon, which in turn, prompted BHP to divert the coal in the Japanese market, and the miner decided to change the type of coal it produces in the New South Wales.

However, the Japanese specification demands more prominent energy requirement. BHP’s Mt Arthur supplies the coal which produces 5,500 kilocalories of energy per kg to China, and the Japanese market requires a minimum of 6,000 kilocalories per kg.

The production of extra energy would mark eminent steps such as extra washing of coal, which in turn, could increase the per unit cost of production, which could only get indemnified with higher coal premium on coals with extra energy.

The extra premium of high energy coal generally circulates at US$10; however, over the increased global stance to curb down the environmental pollution in line with Euro 6 emission standards have witnessed a drastic drop in coal prices in the past few years.

BHP seems to have considered all the coal-related facts and the company recently decided to exclude coal and cobalt out of its product portfolio. Post the completion of the Mt Arthur mine life; the Australian mammoth could exit the coal business; just as Rio Tinto (ASX: RIO) did in the past.

PNG LNG Scenario:

Another topic brewing on the import front is the development in the LNG sector.

Post addressing the impact of the recent tariff hike in the Queensland on the LNG exporters, let us now look over on how the promised expansion delay in Papua New Guinea is looming the LNG sector in the country.

The newly elected Prime Minister of the country- James Marape, ex-finance minister of the country, has a long backdrop over the US$14 billion expansion agreement signed by the previous Prime Minister- Mr O’Neill. Mr O’Neill signed and negotiated the US$14 billion expansion agreement for the LNG industry without consulting Mr Marape.

Behemoth player such as the U.S. ExxonMobil and French giant- Total are longing the PNG LNG and Papua LNG project along with Australian explorers such as Oil Search Limited (ASX: OSH) and Santos Limited (ASX: STO).

As per the market experts, the go-ahead for the US$14 billion expansion of the Papua LNG projects is likely to see a green flag in the second half of the year 2020 as Mr Marape is not looking to shun away the investors.

Papua New Guinea is planning to double up its LNG sector, as the economy of the country derives a significant pull from the sector.

Original Agreement:

The PNG Government signed a US$ 12-14 billion agreement with Total and ExxonMobil along with the Oil Search and Santos to develop the Papua LNG project on 9th April 2019.

As per the agreement, the project would utilise the gas from ELK-Antelope fields in the Gulf Province, which is estimated to contain reserves of 1billion barrels of oil equivalent, which would further get purified and liquefied by the facilities to be built by the agreement partners Total and ExxonMobil on their PNG LNG plant in the Port Moresby, each with a capacity of 2.7 million tonnes.

As per the media releases of Total, the production capacity of the project would be 5.4 million tonnes per annum.

Under the agreement terms, PNG’s Government ensured that a share of the 5.4 million tonnes capacity remains in the domestic market, which would further help PNG to achieve its goal of expanding electricity coverage to 70 per cent of the country by the year 2030.

The respective shares of the companies and the government are as:

In a nutshell, the previous delays in the project development are likely to end in the second half of the year 2020, and the project is expected to commence production in the year 2024. However, the investors should eye on the ongoing talks in Papua New Guinea to further reckon the development.


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