The cut-price coal era

The International Energy Agency has questioned whether the commodities market is at the end of a super cycle or at the start of a cut-price coal era in its annual coal report.

In its Medium-Term Coal Market Report 2015 released this week it significantly revised its five-year global demand estimate, shaving 500m tonnes of coal equivalent (Mtce) off its forecast in recognition of the “tremendous pressures facing coal markets”.

The downbeat forecast hinges on official preliminary data that indicates that 2014’s decline in Chinese coal demand is to continue in 2015. If confirmed this will mark the first time since 1982 that Chinese coal consumption has suffered two years of consecutive declines. This is significant because China represents half of worldwide coal consumption and has been the crutch of dry bulk shipping for over a decade.

China’s step back is compounded by policy support for renewable energy and energy efficiency that emerged from the recent climate talks in Paris, which will further dent demand for coal.

“The coal industry is facing huge pressures, and the main reason is China – but it is not the only reason,” IEA executive director Fatih Birol said on the launch of the report. “The economic transformation in China and environmental policies worldwide – including the recent climate agreement in Paris – will likely continue to constrain global coal demand.”

China’s dramatic slowdown in coal demand is the result of a combination of a number of factors. Its economy is moving towards a more services-based industry, away from energy-intensive industry that had previously dominated power consumption. Also, a rise in renewable power options, such as hydro, nuclear, wind and solar, is also driving down the need for coal power generation.

The IEA goes so far to predict an alternate scenario in the future premised on China’s coal consumption having already peaked.

“In this so-called ‘peak coal scenario’, infrastructure and energy-intensive industries represent a lower share of Chinese GDP than in the report’s base case, while services and high-tech manufacturing gain momentum,” said the report. In the peak case, Chinese coal demand in 2020 is 9.8% below the level in 2013 and more than 300 Mtce below the base-case forecast of nearly 2950 Mtce in 2020. Meanwhile, global coal demand in the peak case drops to around 5500 Mtce in 2020 – falling 0.1% per year on average, compared with growth of 0.8% per year in the report’s main forecast.

Bright spots

Demand outside of China is expected to take up some of the slack, with anticipated growth in India and Southeast Asia more than offsetting the structural decline in Europe and US through to 2020.

In India, the government is pushing for wider access to energy as well as expanded manufacturing, both of which will drive electricity growth. While India is also pursuing an aggressive renewables strategy –

175 gigawatts of renewables by 2022 – coal will still be needed to meet power requirements.

“The Indian government has ambitious plans to provide full electricity access to the 240 million people still without it and to expand the manufacturing sector, where coal is the lowest-cost base load option,” says the report.

The IEA projects that coal will provide as much as 60% of power requirements through 2020, allowing India to surpass China as the world’s largest coal importer this year.

However, the IEA cautions that India should not be seen as the new China. Different governance and growth models means that dry bulk operators should not seek solace in India.

Other pockets of brightness can be found in Southeast Asia, which promises to be the region with the highest growth rate in coal. Here, Indonesia, Vietnam, Malaysia and the Philippines are actively planning new coal power plants.

But the slowdown of Chinese coal consumption has already taken its toll on seaborne trade, and will continue to do so through to 2020, says the report. Coal prices, in line with other commodity prices, are at rock bottom levels: imported coal in Europe fell below $50 per tonne this month, a level not seen in a decade. The IEA expects prices to remain under pressure through to 2020.

Compounded by the COP21 climate agreement signed, future use of coal greatly depends on the uptake of carbon capture and storage (CCS) technology to cap CO2 emissions.

“Governments and industry must increase their focus on this technology if they are serious about long-term climate goals,” said Fatih Birol. “CCS is not just a coal technology. It is not a technology just for power generation. It is an emissions reduction technology that will need to be widely deployed to achieve our low-carbon future.”