“The interval between the decay of the old and the formation and establishment of the new constitutes a period of transition which must always necessarily be one of uncertainty, confusion, error, and wild and fierce fanaticism.” John C. Calhoun
We’ve previously discussed the clouded prospects for thermal coal. On the one hand, changing environmental attitudes, combined with the implementation of stricter environmental legislation worldwide, is leading to further damage of coal’s image as an appropriate 21st Century energy source.
On the other hand, there is an argument that thermal coal will realistically remain an essential component in the energy mix of many countries, particularly emerging ones.
And there’s a certain amount of logic to support both arguments. However, recent independent market evidence suggests that coal’s future might be more problematic than rosy.
Let’s firstly examine the situation as it related to the world’s biggest thermal coal consumer, China. Over recent weeks it has been reported that China plans to reduce coal production capacity as part of government efforts to firstly cut industrial overcapacity as well as utilise cleaner energy sources.
As Bloomberg reported, “The world’s largest coal consumer aims to eliminate as much as 500 million metric tons of annual output in three to five years, the State Council said in a statement Friday. The country also plans to consolidate an additional 500 million tons a year of capacity among fewer miners, ramp up financial support for some coal companies and encourage mergers, according to the guidelines. All coal companies should be able to produce least 3 million tons a year, it said.”
To put things into perspective, the 500 million-ton target could erase almost 9% of China’s thermal coal capacity. Including projects under development, the country can produce 5.7 billion tons, however only 3.9 billion tons of that is currently in operation, according to independent estimates.
The aggressive targets highlight the determination of the central government to ease oversupply, although there will likely still be a degree of tug-of-war between the central and local governments on when and how those targets can be achieved.
Just as significantly, a statement from the State Council (the country’s highest administrative body) says China will also suspend approvals of new coal mines for the next three years. As part of this strategy the government plans to set up a fund to help coal miners and steelmakers eliminate workers and dispose of bad assets.
The industry theme in China is already ominous, with the nation’s coal imports falling by their biggest margin on record last year, amid weak domestic demand.
And they mirror similar initiatives within China’s steel sector, with the world’s biggest producer set to close between 100 million and 150 million metric tons of annual crude steel capacity by 2020. These amount to around 13% of current capacity and in reality larger cuts are likely to be required in order to bring markets back into balance.
Now let’s turn our attention to India, which has been optimistically promoted as one of the largest growth markets for thermal coal for the next few decades. A Reuters article recently highlighted that contrary to general opinion, a decline in thermal power projects and a rapid up-scaling of renewable-energy projects indicates that India’s appetite for coal is actually dwindling.
Interestingly, even as domestic coal production has risen, growth in new thermal power projects is showing a decline for the first time in the last three years. According to data sourced from government departments, growth in newly-installed thermal power capacity was recorded at 8.78% in 2015, down from 8.99% in 2014 and 12.48% in 2012.
In sharp contrast, growth in new capacity in the renewable-energy sector rose to the highest level ever at 18% during 2015. A senior official with the country’s largest power producer, NTPC Limited, said that the “pipeline of new thermal projects has completely dried up” and “no new plant are scheduled to come on stream in 2016”.
At the earliest in 2018/19, 10,000 MW of new thermal capacity could come on stream in the form of ongoing projects – delayed by varied reasons such as conclusion of fuel supply agreements, environmental clearances and/or scrimping of funding options by project promoters. Ultra mega power projects (UMPPs), planned by the government were also turning out to be “pipe dreams” according to the official, with no such new projects put up for bidding since 2014.
Ominously, even UMPPPs put up for bidding in 2014 had all fallen through, with all successful bidders subsequently withdrawing from the projects. In sharp contrast, in the renewable space the country is poised to commission 2,000 MW of solar power between January and March 2016, equal to the total generation capacity added in the full year of 2015.
While the impact of these trends in the power generation sector on medium- and long-term coal demand consumption patterns was not readily available from government departments, current empirical data indicate that the ‘coal rush’ in consuming industries had eased, giving way to stockpiles at both the producer and consumer ends.
Coal India Limited currently maintain unsold pithead stocks of 40-million tonnes, while thermal power plants across the country were carrying a combined stock of 32-million tonnes of coal as of January 2016, up from 12-million tonnes during the same month a year earlier.
So the evidence in both China and India, two of the industry’s biggest consumers, indicates that thermal coal consumption growth is actually falling. This is enormously significant, because whilst industry watchers are acutely aware of a changing energy balance in Western nations, it has generally been accepted that emerging economies with their burgeoning populations and related growth in energy requirements, would continue to drive coal demand growth – perhaps for the next three to four decades.
Instead, government action in the world’s two most populous nations related to reducing emissions and prompting initiatives in the renewable sector, looks likely to significantly reduce the time period until we reach peak thermal coal demand.