Global coal demand to be balanced by others despite China slowdown

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Picture courtesy: BHP

The International Energy Agency (IEA) has slashed its five-year estimate for global coal demand after a decade of aggressive growth, but still sees a rise despite a price plunge and a slowdown in China.

The two most significant developments at present are the dip in Chinese demand and low prices, said IEA Senior Coal Analyst Carlos Fernández Alvarez, the principal author of the agency’s new Medium-Term Coal Market Report,

“With Chinese consumption slowing or even declining over the next five years, demand growth will be driven mainly by other Asian countries such as India and ASEAN members,” Alvarez said in an interview on the IEA website, adding that in these countries, electrification and urbanisation of a large population will drive increased power demand, and coal and renewables – especially in India – will cover a significant part of this growth.

The report, therefore forecasts a 0.8 percent demand growth worldwide to 2020.

Alvarez said coal prices have been declining since the start of 2011, making every month more difficult for struggling producers. Bust and boom cycles are common in commodities, and high prices and expectations of relentless Chinese growth triggered investments earlier this century that resulted in the current oversupply.

“Exacerbating the situation are the shale gas revolution, which cut coal demand and prices in the United States, and take-or-pay contracts for rails and ports in Australia. Additionally, currency depreciations in major coal-exporting countries and low oil prices (important in mining and transportation costs) have further depressed prices,” he added.

And one reason no recovery is seen soon is the halt in Chinese coal growth. Based on preliminary data and thus subject to revision, Chinese coal use decreased by 2.9%, or 116 megatonnes (Mt), in 2014, the first decline in this century, with preliminary data for 2015 indicating that the shift will be even more pronounced for this year.

“In a country that consumes 4 billion tonnes of coal annually, the picture is very complex, but I would remark on two major drivers of this decline. First, electricity demand grew by only 3.8% while gross domestic product (GDP) grew 7.4%; previously, China’s economic and power-demand growth ran at roughly similar rates. Second, in 2014 hydropower generation was exceptionally high because of both capacity additions and seasonal effects, reducing coal-fired generation and thus consumption of thermal coal,” Alvarez said.

But the bigger picture is that we are seeing structural change in the Chinese economy, with growth increasingly driven by the service sector and less energy-intensive industry. Whereas a rebalancing process is normal in a maturing economy, the question is how fast it will happen in China, he added.

But the report also has an alternative China Peak Coal Scenario in which we assume stronger growth in the commercial sector and lower growth in industry, which consumes a large share of electricity. In this scenario Chinese coal demand already peaked in 2013 and continues to decline until 2020. The total difference in Chinese coal consumption between the two scenarios is roughly 300 megatonnes coal-equivalent (Mtce), or more than China imported in 2014.

Alvarez said there is no doubt that coal demand would be higher without environmental policies – which include air pollution regulations that sometimes are more effective at curtailing coal demand than policies aimed simply at reducing greenhouse gases. But the slowdown and rebalancing of the Chinese economy – or even the US shale gas revolution – has had a bigger impact on coal demand than, for example, the EU Emissions Trading Scheme.

Medium-Term Coal Market Report 2015 sees coal retaining its significant role in the energy mix even as the world works to reduce greenhouse gas emissions. More than 41% of global electricity comes from coal. The report sees that share falling to 37% by 2020 – but because total generation increases, the amount of coal burnt still rises.

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