The fifth of a ten part series examining the trends that will drive the mining industry in 2016.
5. A shift in energy demand: preparing for inevitable change
The changing face of the global energy mix, and the movement away from thermal coal as the world’s primary energy source, means miners will have to change their fundamental view of commodities.
This is being driven both by Climate Change concerns, the push to cut energy costs and reduce carbon emissions, and consumers demanding more renewable energy sources.
“Australia, like the rest of the world, is transitioning towards a lower emissions energy future. As part of this transition we are seeing a reduction in the use of coal and an increase in the use of renewables,” Australian Federal resources minister Josh Frydenberg said.
South Australians know this better than most. Just last month we saw the end of coal-fired generation in this state with Northern and Playford B power stations shutting down.”
The two largest, fastest growing coal consumers have been China and India, which in 2013 consumed 60 per cent of the world’s coal between them; however China is planning to reduce output and turn towards more sustainable energy means.
Last year the country announced plans to reduce coal consumption by 160 million tonnes, following the National People’s Congress.
China’s ongoing pollution and smog issues were the main focus of the NPC, with Chinese president Xi Jinping stating that the government will be increasing focus on the nation’s environmental standards and regulations.
“We are going to punish, with an iron hand, any violators who destroy ecology or the environment,” Xi stated.
The country also plans to supply one fifth of all its power from non-fossil fuel source by 2030.
However the Minerals Council of Australia believes that this isn’t an indicator of a total dumping of coal.
“China’s evolving environmental policies are being confused with a policy shift away from coal,” it has previously stated.
“Coal currently accounts for 80 per cent of China’s electricity output and all leading energy forecasting agencies analysts agree that ongoing industrialisation and urbanisation will drive robust coal demand for decades to come.”
The International Energy Agency expects that coal will continue to dominate China’s energy mix to 2035, and that “China continues to import substantial amounts of coal, remaining a strong force in global coal markets”.
While China is not stepping out of coal completely, alternative power sources are making inroads into its supply mix that will dent the thermal coal market.
Part of this is turning towards gas, with China aiming to use natural gas for more than 10 per cent of its primary energy consumption by 2020.
On the back of this China and Russia have signed a US$400 billion gas supply deal.
The deal, between China’s CNPC and Russia’s Gazprom will run for 30 years and supply around one trillion cubic meters of gas.
In terms of renewables, China plans to increase its wind power capacity from 96GW to 200GW, and solar from 28GW to 100GW.
In Europe, Norway derives 98 per cent and Australia 57 per cent of their power from hydro sources.
Nuclear power is also likely to play a greater role, with France producing 77 per cent and Sweden producing 41 per cent from nuclear sources, with the World Nuclear Association expecting installed capacity to grow 60 per cent globally to 2040.
This paints a dire picture for thermal coal, which is suffering from similar oversupply and undervalue issues as iron ore, and has already driven US majors such as Peabody Energy, Alpha Natural Resources, and Arch Coal to declare bankruptcy.
According to Deutsche Bank’s supply and demand models, thermal coal is running a 30 million tonne surplus, which is predicted to rise to 68 million tonnes in 2018.
Yet, thermal coal is far from dead.
“Most major energy forecasters agree that coal will remain a critical component of the global energy mix for years to come,” Deloitte said.
The US Energy Information Administration (EIA) believes fossil fuels will continue to supply close to 80 per cent of the world’s energy through to 2040, although coal will lose market share – dropping to roughly a fifth of the global energy mix.
Despite this the overall coal consumed will rise in production levels as energy demand grows apace.
China demand alone, despite its plans to reduce coal consumption levels, is predicted to grow to close to half a billion tonnes by 2019.
When it comes to miners themselves, Australia has seen a shift towards solar power for operators whose mines are located in remote areas, with Sandfire Resources installing solar power at DeGrussa, Galaxy at Mt Cattlin, and Rio Tinto at the Weipa mine.
Lithium is also set to play a greater role in the energy production chain, and will strengthen its role as a key component in renewable energy sources (read page 12 to find out more).
The future looks uncertain, however “although forecasts for global energy demand are not assured, one thing is certain: there will always be a need for electricity,” Deloitte Argentina mining leader Edith Alvarez said.
“That means mining companies should be asking which commodities will be required across the entire power generation value chain.”
So what strategies can they implement?
Becoming more agile, and able to respond to region specific market demand will allow coal miners to maintain strength, however pure coal plays will not survive long into the future.
“As the global energy market shifts, mining companies will need to keep pace by considering the full range of market angles,” Deloitte said.
“As new technology demands expand, this will open up opportunities for commodities in related industries, including lithium and/or other metals and minerals used in battery storage, solar panels, and wind turbines.”
The increasing focus on slashing carbon emissions, and the introduction of wider ranging carbon pricing schemes means longer term strategies are needed.
“As miners develop their long term energy strategies, they will need to determine how their processes must change if carbon pricing reporting becomes mandatory rather than a voluntary disclosure.”
With these in mind miners can build a more sustainable portfolio for the next wave of mining.