In the energy sector, a seismic shift is underway. The seaborne thermal coal market is entering a permanent and structural decline. This has been seen many times before, industries innovate or perish. Recall fixed line telcos.
It may not be palatable, but blind hope is no business plan.
In a recent interview, the newly appointed head of the World Coal Association Benjamin Sporton hailed coal as cheap and desirable, claiming this will inevitably make it a major part of the future energy mix, particularly for many Asian countries.
But new imported coal fired power generation is neither cheap nor desirable. It is also increasingly less bankable. With constant technology improvement underpinned by hundreds of billions of dollars of investment each year, renewable energy, battery storage and energy efficiency are reporting dramatic reduction in costs.
This process is far from finished, and will be deflationary for the world’s electricity market.
The International Energy Agency (IEA) last month published its “Projected Costs of Generating Electricity 2015”; released every five years. This report highlights “the clear shift in the interest of participating countries away from fossil-based technologies”. It highlights the contrast between fossil fuel generation inflation and the massive deflation of renewable technologies. The IEA concludes renewables are “no longer cost outliers.”
Sporton also calls for increased taxpayer funding of carbon, capture and storage (CCS) research and development. In contrast, the IEA has reported that CCS development has under-delivered on expectations to the point where even they have removed CCS as a viable core technology alternative in their 2015 report. And if the coal industry won’t fund CCS research, why should it expect taxpayers to do so?
The reality is that the coal industry is facing global headwinds it can do little to control.
Here’s why.
China’s coal consumption is down 7 per cent in 2015. China’s coal imports were down 32 per cent year-on-year in the eight months to August 2015, as the country progressively decouples coal from electricity production, and also decouples economic growth from electricity demand growth.
Similarly, after six years of 20-30 per cent annual growth in coal imports into India, global imports were flat in the June 2015 quarter and then declined 5 per cent year-on-year in July-August 2015.
Indian Energy Minister Piyush Goyal has repeatedly stated the country will stop coal imports within three years. IEEFA believes it may take India up to six years to achieve, but change happens rapidly and two state-wide auctions this year in Telangana and Madhya Pradesh showed that solar power is already cheaper than imported coal, with no inflation for 25 years. Installed cost of solar globally have already dropped 70 per cent in just five years, and this road is only headed in one direction.
Volumes are now declining in the two largest coal import nations globally. Consistent with this, U.S. coal demand is down 10 per cent in 2015 alone, and down 30 per cent since coal demand peaked in 2008. UBS this month forecast US coal consumption would fall a further 45 per cent by 2030. Europe is charting a similar pattern.
Japan is our largest coal export market, but the August 2015 nuclear restart, the US$30bn annual investment Japan is making in solar and the five years of declining demand in Japanese electricity consumption, means that Japanese thermal coal demand is likewise set to decline.
With less demand and renewable energy ramping up, coal prices are hitting record lows. The Newcastle forward pricing of thermal export coal hit a new decade low last month of US$53/t for prices in nominal terms as far out as October 2021. In September 2015 Goldman Sachs cut their long term coal forecast 23 per cent to US$50/t.
That’s too low for too long and the consequences are plain to see.
Big miners are cutting costs, shedding jobs and trying to shed assets. All the players, including Sumitomo, Vale, Peabody Energy, Rio Tinto, BHP Billiton and Anglo American are selling mines or reportedly open to offers. It’s a buyer’s market in Australia, but there are no buyers to be found.
Coal is not going away immediately in India or China, but the coal they burn will be produced domestically and renewable power is an increasingly significant part of the mix, squeezing out higher cost imported coal.
One only has to look at the equity markets to get a clear picture. Investors have lost their shirts backing the likes of Peabody Energy, which has seen its value drop by 96 per cent in five years.
It’s certainly a tough time to be the new head of the World Coal Association. But claiming there’s ‘a strong story for coal’ does no-one a service, least of all the Association’s members. Fairytales may have a happy ending, but the first step to adapting to change in the business world is facing reality.
Tim Buckley is the director of Energy Research, Institute for Energy Economics and Financial Analysis.