“Peak coal” is here.
Goldman Sachs released a September 22 research note that predicted that coal will decline and never come back. “Peak coal is coming sooner than expected,” the investment bank concluded. “The industry does not require new investment given the ability of existing assets to satisfy flat demand, so prices will remain under pressure as the deflationary cycle continues.”
The conclusion is a stunning one, especially considering the years of predictions that coal would climb inexorably as developing countries expanded their grids and their economies grew quickly. Last December, for example, the IEA predicted that coal consumption would grow steadily in the years ahead, expanding by about 2.1 percent per year for the rest of the decade. China would account for three-fifths of the growth in demand. “We have heard many pledges and policies aimed at mitigating climate change, but over the next five years they will mostly fail to arrest the growth in coal demand,” the IEA’s executive director said in December 2014.
But a lot has happened since then. Most important is the growing realization that China’s coal demand may not continue, a remarkable development, and perhaps a fatal one for many coal producers. The slowing demand for coal, along with the general commodity bust around the world, spells bad news for the coal industry. Goldman Sachs takes a dim view of coal prices for the foreseeable future. “We also reset our long-term forecast to $50/[tonne], down 23 percent from $65/[tonne], to reflect what we see as the remote likelihood that the market will tighten ever again,” the bank wrote.
In fact, it’s not just that demand growth will decline. Absolute demand will fall. Goldman Sachs predicts that global consumption of thermal coal used for electricity will dip from 6.15 billion tonnes in 2013 to just 5.98 billion tonnes in 2019. The decline is not enormous, but given the fact that not too long ago coal producers around the world expected strong growth for the next few decades, the downturn in coal demand is monumental.
Several coal producers in the U.S. have already gone bankrupt, including Alpha Natural Resources and Patriot Coal. Just this week, Arch Coal faced questions over a potential bankruptcy. Peabody, another major coal producer, is hoping to restructure some debt according to Bloomberg.
By Charles Kennedy of Oilprice.com
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