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The Golden Age Of Coal In China Is Over

The Golden Age Of Coal In China Is Over

China’s coal consumption may have peaked in 2013, and with it, so have the coal industry’s fortunes.

A new report from the International Energy Agency (IEA) finds that preliminary data suggests that China’s coal consumption in 2015 is lower than 2013 levels. Slower economic growth, lower energy-intensity of growth, and a campaign to reduce air pollution have severely dented the prospects for coal in China, the report finds.

China consumes half of the world’s coal, so what happens in China tends to dictate what happens to coal markets around the world. China tripled its coal consumption since 2000, and it burns about five times as much coal as the United States and India, or about two and a half times as much as those two countries combined (see chart).  Related: Strong Dollar, Warm Weather, Full Storage Keep Prices From Breaking Trend

(Click to enlarge)

But the IEA says we could be at a watershed moment, in which China’s coal consumption could be starting to decline. And China’s potential “peaking” of coal consumption led to the first decline in global coal burning in 2014 since the 1990s. Related: Lithium: The Bright Spot For The Commodity Sector

For many years, China’s coal consumption grew at almost identical rates to its GDP. But in 2014, China’s electricity consumption grew at only 3.8 percent while GDP expanded by 7.4 percent, showing the initial phases of a decoupling of energy consumption from growth. China’s steel demand is also way down, reducing demand for coking coal.

Meanwhile, the IEA says that while the near-term effects are uncertain, global environmental policies to address climate change will slash coal demand even further over the long-term. The IEA issues a dire warning that should worry those invested in coal: “current unabated burning is incompatible with climate stabilization.” But it isn’t just carbon emissions. Environmental regulation seeking to crackdown on toxic air pollution from coal burning is slashing coal consumption today, a trend that is particularly evident in China.

In short, the IEA says, “the golden age of coal in China seems to be over.” Coal consumption in the U.S. and the EU is already in structural decline, and now the same could be true for China. The Paris-based agency cut its global demand forecast for coal by over 500 million tonnes of coal equivalent by 2020.

As China cleans up, the heart of the world’s coal burning will shift from China to India. Global coal consumption will only grow 0.8 percent per year through 2020, but half of that will come from India. India recently surpassed the U.S. to become the world’s second largest coal consumer. With that said, India’s economy is not as energy-intensive as China’s, so India will not replace China in terms of the scale of coal consumption. Related: OPEC Members In Jeopardy, How Long Can They Hold Out?

On the supply side, the coal mining industry is in very bad shape. The long commodity “supercycle” of the past decade is over, as deflationary conditions wash over the commodities sector. A surplus of coal production is weighing on prices, pushing coal companies into bankruptcy. But the problem of overcapacity won’t be alleviated anytime soon. The IEA says that there is still coal mining capacity in the pipeline, which could add to the woes of the industry. SNL Financial outlined the scope of the problem in an article from December 14. Bankrupt mines continue to produce, even though their business has essentially been killed off. That prevents what should be a natural adjustment to market conditions. "The problem with this industry is nobody will close a goddamn coal mine," a top coal market analyst said at a December 8 conference in Manhattan, according to SNL Financial.

U.S. coal miners are in feeling the pain more acutely. The strong dollar is putting U.S. coal companies at a disadvantage to their Australian competitors. At the same time, with U.S. utilities switching from coal to natural gas and renewables, American coal companies are getting hit from all sides.

What is especially troubling for coal companies and their investors is the possibility that the downturn in coal markets is permanent. “[G]iven the dramatic fall in the cost of solar and wind generation and the stronger climate policies that are anticipated, the question is whether coal prices will ever recover,” the IEA concludes.

By Nick Cunningham of Oilprice.com

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