Cooling off on coal

Growth in global coal demand will stall over the next five years as appetite for the fuel wanes and other energy sources gain ground, the International Energy Agency (IEA) says in its latest Medium-Term Coal Market Report.

Further, the share of coal in the power generation mix will drop to 36% by 2021 due to lower demand from China and the US, as well as the fast growth of renewables and strong focus on energy efficiency. This is down from 41% in 2014.

In a sign of coal’s paradoxical position, however, the world is still highly dependent on coal. While coal demand dropped in 2015 for the first time this century, the IEA forecasts that demand will not reach 2014 levels again until 2021.

But such a path would depend greatly on the trajectory of China’s demand, which accounts for 50% of global coal demand, almost half of coal production and more than any other country influences global coal prices, adds the IEA.

The new report also highlights the continuation of a major geographic shift in the global coal market towards Asia. “In 2000, almost half of coal demand was in Europe and North America, while Asia accounted for less than half,” says the IEA. “By 2015, Asia accounted for almost three-quarters of coal demand, while coal consumption in Europe and North America had declined sharply below one quarter. This shift will accelerate in the next years.”

Because it is relatively affordable and widely available, coal remains the world’s number one fuel for generating electricity, producing steel and making cement. Currently, it provides almost 30% of the world’s primary energy, declining to 27% by 2021.

However, it is also responsible for 45% of all energy-related carbon emissions and is a significant contributor to other types of pollution, adds the IEA.

Keisuke Sadamori, director of the IEA’s energy markets and security directorate, continues: “Because of the implications for air quality and carbon emissions, coal has come under fire in recent years, but it is too early to say that this is the end for coal.

“Coal demand is moving to Asia, where emerging economies with growing populations are seeking affordable and secure energy sources to power their economies. This is the contradiction of coal – while it can provide essential new power generation, it can also lock-in large amounts of carbon emissions for decades to come.”

Sluggish coal demand

The IEA acknowledges China’s continued dominance in global coal markets in its report. It says that coal-fired power generation in China dropped in 2015 due to sluggish power demand, and a diversification policy that led to the development of new renewable and nuclear power generation capacity.

IEA’s forecast for Chinese coal demand shows a very slow decline, with chemicals being the only sector in which coal demand will grow, reaching 2,816m tonnes of coal equivalent by 2021.

In the US, coal consumption dropped by 15% in 2015. This was sped up by competition from cheap natural gas, cheaper renewable power and regulations to reduce air pollutants that led to coal plant retirements, says the IEA.

The IEA expects another substantial decline in 2016, and thereafter forecasts a 1.6% per year decline. “This is much slower than 6.2% decline over the past five years, as higher gas prices result in less coal-to-gas switching,” it says.

 Shorter sailing distances

International shipping association BIMCO confirms that Australia and Indonesia, being the main exporters of coal to China, are growing their market share at the expense of longer haul exporters like the US and South Africa. Therefore, dry bulk ship owners  do not benefit from a concurrent increase in tonne-mile demand when Chinese imported coal volumes increase.

BIMCO’s chief shipping analyst Peter Sand says: “After dropping in 2015, the commodity trades into China are now showing great support to the dry bulk shipping industry. The coal imports are achieving levels as before in 2015 and together with the highest level of imported iron ore, China is keeping the wheels rolling in terms of shipping volumes.

However, “despite a solid surge in coal volumes, the demand side of the dry bulk shipping industry will not benefit to the same extent as before. Since 2014, there has been a change in the coal trade patterns where China has singled out its key distributors and focused increasingly on them. This has brought around shorter sailing distances, due to the proximity of exporters.”

The lion’s share

Mr Sand adds: “In 2013, China’s coal imports achieved high tonne-miles for the dry bulk shipping industry, due to China sourcing 23% of its seaborne coal volumes from origins other than Australia and Indonesia; primarily long haul routes from the eastern part of the US and South Africa.

“These trade patterns have since changed to only sourcing 16% from other origins instead of Australia and Indonesia in 2016. The origins have also changed to primarily shorter hauls from the western part of Canada and Malaysia, and not importing any significant amount from the US and South Africa since October 2014.”

Breaking the trend

Thermal coal appears to be the main driver of the surge in global seaborne imports, amounting to 80% of the imported seaborne volume.  It increased 16.7% for the first nine months of 2016 compared with the same period in 2015, according to BIMCO. Coking coal imports also increased 4.5% in the same period.

BIMCO cites several reasons for the increase in seaborne thermal coal imports for Q2 and Q3. First, it says, imports are highly influenced by the Chinese coal-derived electricity production running at a faster pace due to a steady growth of the Chinese economy, and authorities trying to control its domestic coal production by an operating limit on coal mines.

Further, there has been a reduction in electricity production from hydropower for September, which is down 11.4% year-on-year for that month but still up 8.6% in total for 2016, adds BIMCO.

 “This comes on the back of two years of negative growth in coal-derived electricity production. Thus, the question remains, is the recent surge in thermal coal imports only a short-term change in trend?”, concludes BIMCO.