China's demand for Australian coal will decline rapidly over the next few years as investment in rail infrastructure and cheap coal from its neighbours begins to pay off, new research shows.
The economics of importing coal from Australia, rather than politically-friendly Mongolia, won't stack up for our biggest importer, academics at the Australian National University say.
Their study found demand will reduce 20 to 25 per cent for steel-producing coking coal and 20 to 30 per cent for energy-generating thermal coal, over the next five years.
Industry loyalists had hoped an easing of China's ban on Australian coal last October could signal lasting change, with demand expected to resume when sanctions lift.
The report released on Thursday found China's investment in coal transport infrastructure, whether to impose trade embargoes or prop up domestic mining, had greatly reduced the cost to China to cut imports.
According to researchers, Australia, which exports a quarter of its coal to China in normal years, stood to lose the most.
Dr Jorrit Gosens, lead author of the study, said even if Australia reconciled its political differences with China it should expect demand to be well below pre-conflict levels.
"China has been investing heavily in coal transport infrastructure for many years, precisely to reduce dependency on foreign energy," Dr Gosens said.
"The recent turmoil in global energy markets will only strengthen Beijing's resolve to decrease its dependency on them."
Researchers looked at where coal was mined in China and neighbouring countries and where it was consumed in power and steel plants. Using a model of the transport network between those points, including all rail and truck routes, they calculated how much it cost to transport coal via those modes.
Dr Gosens said improved transport routes - coupled with plans to reduce coal consumption - had a substantial impact on imports, as it improved the competitiveness of domestically-mined coal.
According to the report, Mongolia will expand production of coking coal at its New Tavan Tolgoi mine, which will be transported relatively cheaply by rail due to the opening of two rail lines later this year.
The railway connecting the mine to the border crossing at Ganqimaodu in China and to the Russia-China railway at Zuunbayan in Mongolia will start operation in mid-22 after being delayed by COVID, the authors wrote.
Dr Gosens said the quality of coal coming from Mongolia was roughly comparable to Australia's coking coal.
"It'll be a very high quality and cheap alternative and also for the Chinese, which is probably quite important, coming from a politically more friendly foreign country," he said.
Dr Gosens said the plans for expanding the mine in Mongolia and railway investment predated the current conflict by five to 10 years.
"I wouldn't tie it directly to the conflict with Australia," he said. "What I would say is that China already figured that Mongolia would be an easier foreign country to deal with."
Dr Gosens said it was mostly Chinese capital financing these projects, so it was more akin to China starting a mining project in Mongolia.
"Mongolia will be very unlikely to bite the hand that feeds it because it's a very important source of foreign investment," he said.
In addition to ramped up domestic production, China has set a target for peak emissions by 2030 and carbon neutrality by 2060, signalling a transition away from dependence on fossil fuels.
Dr Gosens said continued coal consumption would depend on whether post-pandemic stimulus measures were targeted at construction projects, which tended to be emission and energy intensive.
He said for Australian exports to China to remain the same, its growth in thermal power production had to be about four to five per cent per year over the next five to 10 years.
"We looked at several different projections and no one expects those kinds of levels," he said. "It's going to be more like one or one and a half per cent growth over the next five to 10 years."
Dr Gosens said close to half the world's new installations of wind and solar had occurred in China in the past few years, which had been "very scientific" in its approach to global warming.
"They are aware that they are quite vulnerable to the effects of climate change and yes they are investing, investing massively," he said.
Prime Minister Scott Morrison has vowed to support the coal industry should the Coalition be re elected, but has stopped short of committing to government built coal power stations.
Opposition leader Anthony Albanese was asked on Wednesday why his government would not sign the United Nations pledge to stop coal if elected.
"Because coal is a part of our energy mix," Mr Albanese said. "Here in Australia, right now. Coal is a part of our energy mix here."
With more than 70 countries having committed to net zero, Australia's billion dollar export has potentially lost favour amongst its other major customers too, which include Japan, India, Korea and Taiwan.
Dr Gosens said Japan and Korea had decarbonisation plans in place - with Korea slated to invest heavily in nuclear power - and while India's net-zero target was 2070, it was quite unlikely India would replace demand not being generated by China.
He said these countries, like Australia, were grappling with how winding down consumption would affect mining jobs and would prioritise domestically produced coal.
"There will be political reasons to prefer the domestically mined coal," Dr Gosens.
Study co-author Professor Frank Jotzo said governments and investors would be wise to consider these findings in their medium to long-term outlook, over short-term gains from the current energy market volatility.
"Our findings illustrate how energy security concerns, a fractured global security and trade landscape, combined with climate action are putting the squeeze on coal - not in the distant future but imminently," Professor Jotzo said.
