There has been a lot of news surrounding the recently proposed Chinese ban on imported thermal coal. We know the ban will impact some Indonesian mines but how will it impact producers in the U.S. and will this create an opportunity? The specifics of the proposed ban, which all indicators point to becoming a reality, are to restrict imports of thermal coal that fall below 8,200 Btu/lbs, or are above 25% ash adb and 1% sulfur adb.
In 2012, the U.S. exported 10.1Mst of coal to China. This equates to slightly under 10% of total U.S. exports for the year. However, of that amount, 6.9Mst was metallurgical coal and would not be impacted by the ban. We can, therefore, look at the remaining 3.2Mst on a basin-by-basin basis to determine which basins would be impacted and, specifically, which companies. Additionally, we should consider the long-term impacts of the ban.
Working our way east to west, we'll first look at Appalachia. There are very limited thermal exports to China coming from Northern Appalachia. These exports, however, would be impacted by the ban as they have >1% sulfur. Total volumes are difficult to pin down but are probably in the range of 600,000 tons and could therefore be fairly easily absorbed in the domestic market without making any major waves. Central Appalachia also has limited thermal exports to China (somewhere in the range of 1Mst) but these exports should not be impacted as they, most likely, would pass all the hurdles of the ban. Southern Appalachia exported no thermal to China. So in general, the ban would have a very limited impact on Appalachia.
Moving west, the Illinois Basin would be most impacted by the ban. Exports to China were in the range of 1.5-1.6Mst in 2012 but would be restricted by the ban as the coal has >1% sulfur. The bulk of these exports came from Foresight Energy, a privately-held company. As you can see in the below graph, 1.5Mst makes up a small percentage of total ILB exports. However, continued growth of ILB export potential (of which China was certainly a part) is one of the key drivers for most producers in the basin. Currently, the ILB exports a great deal of coal to Europe which is the same 1% sulfur ban. To circumvent this, ILB coal is often blended with PRB coal to reduce the sulfur content.
Powder River Basin
This point brings us to our final Basin, the Powder River Basin (we'll skip the Western Bituminous region as they do not export to China). The Powder River Basin exports very small volumes to China, primarily through terminals in Western Canada. PRB coal would continue to be allowed under the proposed ban as it meets all the criteria. Significantly, PRB coal's caloric content averages around 8,500 Btu/lbs - slightly above the cut-off of 8,200 But/lbs. This is, no doubt, by design as China would be more than happy to diversify its supply with volumes from the PRB if a large-scale export terminal is to be built in the Pacific Northwest (see this article for more detail on the topic).
The significance of the proposed ban on U.S. exports and production in the near-term seems to be fairly muted. This is fortune for U.S. producers but, unfortunately, an immediate trading opportunity is not apparent from the ban. However, some long-term impacts are clear. Specifically, China has clearly signaled its eagerness to open the PRB as a new high-volume supply source by setting the caloric content limit just below PRB averages. Secondly, ILB producers that plan to export to China under the proposed ban will need to blend with PRB coal prior to shipment. So, although significant impacts may not be immediately felt, this is good news for producers in the PRB such as Arch Coal (NYSE:ACI), Cloud Peak (NYSE:CLD), Peabody (BTU), Westmoreland Coal (WLB) and Alpha Natural Resources (ANR). On the flip side, producers in the ILB now have a potential hurdle if they still plan on keeping Chinese exports as a major part of their growth plans.
Disclosure: I am long CLD, ACI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.