25/07/2017
What is happening to Coal?
The future appears to be very uncertain for a commodity that has undoubtedly played a significant role in air pollution and the resultant climate change.
BP’s chief economist recently said that there is a major shift away from coal to other means. Many of the factors driving the shift are structural, long-term factors such as the growing com-petitiveness of natural gas and renewable energy combined with mounting government and societal pressure to move towards cleaner, lower-carbon fuels.
That pressure has been strongest in China. Chinese coal produc-tion has declined for three consecutive years, coinciding with the slowing of industrial growth, but according to BP's Statistical Review of World Energy 2017, published June 13th it has never declined more than it did in 2016. At the beginning of 2016 Chi-na enacted a series of policies designed to reduce an over-supply, including closing 1,000 mines and restricting mining days to improve the profitability of the ones that remained open. Coal prices increased very sharply as production was reduced, increasing by more than 60 percent during 2016. Those higher prices not only crushed coal consumption in China, they affected coal consumption worldwide.
According to BP, the nature of the global coal markets meant that global prices then took their cue from what was happening in China, with coal prices around the world all following a similar trend. That fed through to reducing coal demand around the world, where we saw the second consecutive fall in global coal production and the largest ever fall in BP’s records in terms of global coal production.
While China's policy may be temporary, coal is unlikely to recov-er from it because of the long-term changes that are happening simultaneously, such as declines in the cost of natural gas and renewables and the growing preference for renewables in devel-oping countries such as India.
China still consumes a lot of coal. About two thirds of its energy is coal fired, though it plans to push that number below 50 per-cent over the next 20 years. The effect of China's war on coal can often be observed more clearly in other countries.
World coal consumption dropped by 1.7 percent in 2016, ac-cording to the BP Statistical Review of World Energy. In the Unit-ed Kingdom, for example, the last three coal mines closed in 2016 and consumption dropped to levels last seen 200 years ago at the start of the industrial revolution. This April the UK power sector celebrated its first coal-free day.
Consumption fell by 53 million tonnes of oil equivalent (mtoe), which equates to about 79.5 million tonnes of hard coal on an energy basis, the review said.
Global production of coal plunged 6.2 percent to 3,656 mtoe, or about 5.5 billion tonnes of hard coal, the review said, the largest annual drop on record.
That's the good news for efforts to curb the use of the most-polluting major global energy source.
The bad news is that 2017 may well see coal output and con-sumption increase from last year, and as usual with most things coal, it's all about China, which accounts for about half of global consumption.
China is also the world's largest producer and importer of the fuel and while the authorities in Beijing have had success in re-ducing coal's share of the country's energy mix, so far this year is on track to see an increase in demand.
This is largely because 2016 was somewhat exceptional in China from a coal perspective, with two factors combining to lower output and demand.
The first was a policy driven move to restrict production by lim-iting the working days of domestic mines, which was aimed at boosting prices to ensure the viability of the industry as well as curbing air pollution. If anything, the policy was too successful, resulting in a 9 percent drop in output in 2016 to 3.64 billion tonnes, the third consecutive annual decline.
Rapid price gains and worries over a shortage of domestic coal prompted Beijing to reverse course, allowing mines to boost output to ensure adequate stocks and reduce reliance on im-ports, which surged 25.2 percent last year. China's coal produc-tion rose 12 percent in May to 297.8 million tonnes from the same month last year and for the first five months of the year, coal output is up 4.3 percent to 1.4 billion tonnes. A hot start to summer and low levels of inventories suggest that both domes-tic production and imports may rise in coming months.
The weather was the other factor behind the decline in China's coal demand in 2016, with both a mild summer and winter curb-ing the need for electricity. If this summer does prove to be warmer than usual, it's likely that this alone will be enough to boost coal demand for the year with the increased energy de-mand for cooling.
Imports are also still rising in China, with 111.7 million tonnes imported in the first five months of the year, up 29.6 percent from the same period in 2016. Rising imports will support coal production in China's main suppliers, Australia, Indonesia, Mon-golia and Russia.
From personal observations, the Mongolian coal, sitting right on China’s doorstep has the potential to become a major player. Exploration is continuing at a rapid rate and the quality of the coal and thick seams of good quality coal that are located close to surface may become a problem for producers further away from China.
If China's domestic coal output maintains the growth rate for the first five months of 2017 for the entire year, it implies pro-duction will rise by about 160 million tonnes from 2016. This is slightly less than half of what global coal output fell by in 2016, according to the BP review.
It's also likely that coal output will increase in other countries. India's state-owned producer targets production of 660 million tonnes in the fiscal year from April 2017 to March 2018. If achieved, this would be an increase of 106 million tonnes from the 2016-17 fiscal year, but it's extremely unlikely Coal India will get anywhere near its target, if history is a guide. In 2016-17 the company fell 44 million tonnes short of its target, but still man-aged to produce some 25 million tonnes more than it did the prior year. Nonetheless, it's likely that India will increase output in the current year, and even an increase of the magnitude achieved in 2016-17 will add significantly to global production.
Indonesia, the world's top exporter of coal, is expected to boost output by nearly 5 percent in 2017, or about 20 million tonnes, to 460 million tonnes, according to the country's coal mining association.
If U.S. President Donald Trump has his way, coal output in the world's second-largest producer will rebound, although most analysts dismiss this as unrealistic. What is more likely is that coal output in the United States may stabilize, with higher pro-duction of coking coal used to make steel offsetting any declines in coal for power generation.
Colombia, the world's fifth-largest coal exporter, plans to boost output by 4 million tonnes this year to around 95 million tonnes, a government official said on March 22.
Another factor to consider with coal is price, and it's likely that part of the decline in consumption in 2016 was related to the strong rally over the year. The Asian benchmark weekly thermal coal price at Australia's Newcastle port more than doubled from the start of 2016 to the peak of $109.69 a tonne in November. It has since slipped back to $80.79 a tonne for the week ended June 9, with this decline improving the competitiveness of coal against other generating fuels, such as natural gas.
Overall, with major coal producers planning to boost output this year, it's possible that 2017 will see an increase in production and consumption, or at least a sharp slowdown in the rate of decline.
Some of the major players have taken a long term positive view, as evidenced by the recent M&A activities. There appears to be some uncertainty about who actually purchased Rio Tinto’s Aus-tralian assets. On June 9th Glencore announced that it had con-cluded the deal at USD2.55 billion but on 22 June it was an-nounced in The Asia Miner that Yancoal Australia was accepted as the winner but more recent reports indicate that the battle is not over yet with each trying to out-bid the other.
Yancoal is an Australian subsidiary of large Chinese mining com-pany Yanzhou Coal Mining, which wants to expand its foreign assets and officially entered negotiations with Rio Tinto in Janu-ary. According to The Asia Miner, Glencore’s offer was $100 million greater than Yancoal’s but was ultimately not chosen. Yancoal was originally to pay $1.95 billion up front and the $500 million remainder in instalments for the next five years but it changed the proposal to a lump sum payment after Glencore made its bid in early June.
Addressing some concerns about how it will finance the deal, Yancoal announced earlier this week that State-backed Yankuang Group, which controls a 56.2% stake in Yanzhou, would supply up to $2.1 billion in funding if needed to complete the sale.
