China's pollution epidemic has finally spurred the country's leadership to declare a war on smog. It's about time. Chinese citizens are angry about what's going into their lungs, while a recent government report says pollution has left 16 percent of the country's land unfit for use. Much of that pollution can be traced back to the billowing smoke stacks attached to China's fleet of coal-fired power plants. If Beijing is indeed sincere about taking the fight to pollution, then these aging plants will be on the front line. Global coal producers are already sitting up and taking notice.
China relies on coal for roughly three-quarters of its power generation. Its coal-fired power plants combust nearly as much coal as the rest of the world put together. Coal prices, for their part, are already tumbling in part due to a slowdown in China's economic growth. Spot prices at Newcastle, Australia, the world's largest thermal coal exporting terminal, have plunged from a monthly average high of $142 a ton in January 2011 to $78 a ton last month.
A glut of coal is translating into falling coal prices and serious losses for global coal producers. According to an estimate from Goldman Sachs the cost of producing thermal coal is now 15 percent higher than what mining companies are getting when they sell it. Something clearly has to give -- and it is. High-cost mines, be they for the thermal coal used in power generation or the metallurgical used to make steel, are shutting down around the world. In Australia, mining giant Glencore Xstrata is closing its Ravensworth mine, while BHP recently shuttered its Gregory and Norwich Park mines. In Canada, Walter Energy is closing its Wolverine mine near Tumbler Ridge, British Columbia. Teck Resources, meanwhile, is halting plans to revive its nearby Quintette coal mine.
China's slowing economy is also emerging as an ever-bigger concern for coal producers. The days of China regularly notching double-digit economic growth are gone. The latest quarterly numbers show the country's GDP growth is at its tamest level in years. A slower economy, of course, means less power demand and falling coal consumption. That's bad news for coal producers that were counting on China's coal-hungry economy to continue growing at gangbuster rates. Added to which, they now have to grapple with Premier Li Keqiang's pending war on pollution, which is already threatening to close down some of the more offensive coal-fired power stations.
China's environmental track record may not inspire much confidence that real change is in the offing. Investors in coal companies, however, would be wise to listen to what Premier Li is saying. China's official news agency reported this week that the Chinese legislature is about to unveil new environmental protection laws. It will be the first update to the legislation since 1989 and it's expected to give Premier Li the tools he needs to clean up the country's air. The Premier, who plans to be in power for a long time, has identified pollution as a national priority. Unlike the modus operandi of western democracies, China's communist government has the clout to steamroll through whatever changes it believes are necessary. Authorities have already shut down a number of carbon-belching coal and steel plants that ring some of the country's major cities.
China's sudden interest in combating pollution isn't a result of external pressure to comply with an international climate change agreement nor does it stem from a newly heightened sense of moral obligation to Mother Nature. China marches to its own drummer and the horrendous air quality engulfing its major cities has simply become too problematic to ignore.
Air pollution in parts of China is frequently measured well in excess of what are considered globally accepted levels for safety. In Beijing and Shanghai, citizens routinely wear masks when going outside. Just last month, parents in Shanghai were told to keep their children indoors because of air pollution levels that were eight times higher than the standards set by the World Health Organization. In December, record levels of smog even forced Shanghai to close one of the world's busiest airports, Pudong International, due to a total lack of visibility.
This degree of unacceptable air pollution isn't happening in a far-flung rural region like Inner Mongolia. Instead, it's there for all to see -- and more importantly breathe -- in the country's two premier cities, including its seat of government. More and more, the people living in those centers of economic and political power are demanding action.
Markets can expect China's leadership to respond to those demands. When it comes to coal, investors should start recalibrating their expectations for the industry. China's slowing economy and its emerging war on pollution will put the reins on global coal demand. As that happens and prices go lower, mining companies will be forced to close more mines, which will curtail production as well as profits.