China Free Trade Agreement Removes Impost on Australian Coal

By James Paton  Nov 17, 2014
Bloomberg
A free trade agreement with China, the world’s biggest coal consumer, will help miners in Australia struggling amid a global glut.

A 6 percent import tariff on power-station coal will be eliminated over two years, while the 3 percent tariff on steelmaking coal will be removed on the first day, according to an e-mailed statement today from the Australian government.

The agreement, due to take affect next year, was announced today after Chinese President Xi Jinping addressed Australia’s parliament in Canberra.

The removal of the tariffs will help bolster margins of producers in Australia. The nation’s A$13 billion ($11.4 billion) dairy industry will also be among the beneficiaries, along with miners of metals including copper, aluminum, nickel, zinc and titanium dioxide.

“The agreement will eliminate tariffs that add nearly A$590 million in costs to the bilateral minerals and energy trade,” Brendan Pearson, the chief executive officer of the Minerals Council of Australia, said today in a statement.

Oversupply and slowing demand growth have depressed coal prices, forcing companies from BHP Billiton Ltd. (BHP) to Glencore Plc to reduce costs and shutter mines.

Two-way trade, which reached A$151 billion in 2013, has been driven by China’s insatiable appetite for resources and energy, while Australia mainly buys Chinese manufactured products.

Earlier Levy

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.

The trade agreement would benefit Australia’s agriculture and services industries in particular and lead to an increase in Chinese investment in the country, Paul Bloxham, chief Australia economist at HSBC in Sydney, said before the announcement.

“This is big deal,” Bloxham said. “We think it’s going be a support for growth” in the Australian economy.

Greenhouse Gas

The 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.”