VANCOUVER - It has not been a good year for coal. Australian coal loaded at the port of Newcastle, a leading benchmark for global thermal prices, started the year at US$125 per tonne. Today it is worth just US$90 per tonne, a decline of almost 30%.
Does that decline portend a failing coal market? Is the world finally breaking free from one of its dirtiest sources of power? Will Santa soon be alone in the lineup to buy lumps of coal?
The answer is a resounding no. Coal currently supplies 28% of the world's energy needs and demand is growing across the globe, with the United States as the only exception. Within five years that demand growth could push coal past oil as the world's top energy source.
So says the International Energy Agency (IEA) in its latest coal report. Why then did coal so struggle this year? For three main reasons: slowing Chinese growth, a sluggish global economy, and competition from cheap natural gas in North America.
As the year draws to a close, two of those factors are shifting back in favour of coal: Chinese coal demand is once again on the rise and natural gas in North America has bounced from less than US$2 per MMBtu to almost US$3.50. The result is a brightened outlook for coal in 2013 and beyond.
Despite that brightness, coal often seems like oil's dumpy cousin. Traders track oil prices with a feverish passion; because of all that attention, oil prices rise and fall, even spike and plummet, in reaction to the news of the day. Coal prices, by contrast, seem almost obscure, rarely mentioned in the mainstream media and much slower to respond to the events of the day.
The difference stems partly from the nature of the coal pricing system. Each coal transaction is priced individually; coal price quotes are simply the average of the transactions for that type of coal in within a certain time frame. The system means that listed coal prices are a summary of what already happened. The spot prices for oil or gold, on the other hand, are current and responsive.
But coal's more complicated and less timely pricing system is not the only reason it is ever overshadowed by its splashy cousin. Coal simply doesn't grab our attention the way oil does – rather than drumming up images of power and wealth, coal connotes thoughts of pollution and perhaps poverty.
However, if the IEA's predictions are correct, it's time to alter that image.
Demand growth for coal is slowing from its breakneck pace of the past decade, but grow it still will. Over the next five years global coal consumption will increase by 16% or 1.2 billion tonnes, putting coal on par with oil atop the list of world energy sources.
China leads the coal charge on the demand front, in a dramatic turnaround from just a few years ago. It was only in 2009 that China became a net coal importer for the first time. Two years later, it became the largest coal importer, surpassing Japan, which had held the position for decades.
With a few numbers the magnitude of that story becomes clear. Last year China consumed 3.4 billion tonnes of coal, which represents nearly half of total world output. It also represented demand growth of more than 7%, a trend that is expected to continue almost apace. As a result, China will soon consume more than half of global output. It is by far the largest user of coal in power generation, relying on coal for roughly 80% of its power needs.
The thermal coal export scene has also been upended of late: Indonesia is now the world's largest coal exporter, supplanting long-time leader Australia. However, the IEA expects Australia to soon retake top spot. With several mega mines under construction and infrastructure upgrades underway, Australia expects to export 356 million tonnes per year by 2017, well above Indonesia's 309 million tonnes.
Those Australian coal construction projects also deserve a few numbers to highlight their size. Chinese mining giant Meijin is planning to build a A$5-billion coal project in Queensland able to produce 60 million tonnes of coal per year. That is four times more coal than the current largest coal mine in the state, the Goonyella Riverside mine. Meijin's mine, if approved and built, would be the third mine of its size under construction, as GVK Hancock and India's Adani are also advancing plans to build mega mines.
There are a few bad news stories in the coal world. The biggest of them is the United States, which had long been a major producer and consumer of thermal coal until the emergence of shale gas. Once fracking technology unlocked these massive shale reserves, natural gas price in North America plummeted, dropping from a high of US$13 per MMBtu in mid-2008 to less than US$2 per MMBtu in mid-2012.
Every utility able to switch from coal to gas did so, and in short order coal prices in the United States lost their footing. From unsustainable highs above US$100 per ton in 2008, the price of Central Appalachian thermal coal dropped to its current level near US$60 per ton. With their product suddenly worth much less, many US mines reduced output, laid off workers, or shut down completely.
And since the country is still overflowing with shale gas, the future does not look good for coal in the United States. The IEA estimates US coal demand will come in at 600 million tonnes in 2017, down notably from 697 million tonnes in 2011. Production numbers are expected to follow a similar path, dropping from 771 million tonnes in 2011 to 697 million tonnes in 2017.
As US coal demand declines, India will step up. India has huge coal reserves, which it has been slow to develop because of regulatory wrangling and environmental concerns. However, the country does not have enough power to fill its current grid, which is what led to the massive blackout in August, and it is trying to provide power to another 400 million citizens who have never been connected to the grid.
It's the perfect cocktail for a surge in coal-fired power generation. By 2017 the IEA expects India to be the world's largest importer of seaborne coal and the second-largest coal consumer behind China, surpassing the United States.
Coal competing with oil for top spot on the list of global energy sources – it's not a race many people realize is underway. But it most certainly is. Coal is the lifeblood of the developing world because it is a relatively inexpensive way to boost power generation.
And boost it they must. From India to China, Indonesia to Uganda, the governments of the developing world are trying to provide power to billions of people who have never been able to light their houses. Coal powered the industrial revolutions of Europe, North America, and the rest of the developed world. It only makes sense that it would play the same key role for the countries that need it today.
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