BY R. Bruce Striegler
Last year, 2014, was not a good year for coal. Prices for both metallurgical and thermal coal hit multi-year lows, and both have been troubled by oversupply and falling prices. Continued cost-cutting on the production side has led to an ever-dropping floor. Patricia Mohr, Scotiabank economist and commodity specialist says, “FOB Vancouver, metallurgical coal prices and lesser grades of met coal are currently trading at a low ebb of US$117 per metric tonne (Mt.).” Mohr points to the first quarter of 2014 when prices were in the $144 range, and compares it to the fourth quarter 2013 when prices were about $152 per tonne.
“These are not record low prices, but they’re down because of substantial new mine development in eastern Australia, particularly in Queensland and New South Wales.” She adds that a huge expansion of port and railway facilities in eastern Australia has made it possible to efficiently ship the premium grade hard coking coal to Southeast Asia. “In the medium term, prices may improve, but it’s my perception that it will take a while to turn around.”
Mohr explains that one of the problems that Australian miners are facing are the ‘take-or-pay’ contracts with transportation companies and ports. Under those contracts the coal miners pay rail or port operators an agreed minimum amount even if they require less, or require no access at all. Miners struck these haulage deals at the height of the coal boom in 2011 and now are producing coal at costs higher than the market price. Others are being forced to declare contingent liabilities on their balance sheets where they have obligations to pay for committed but unused port and rail capacities.
Take or pay but still no mine closures
In mid-February this year, the Sydney Morning Herald reported that while the falling Australian dollar and cheaper oil may be providing some relief for the nation’s coal producers, these conditions are preventing what the sector needs, which is mine closures. At the same time, resources consultancy Wood Mackenzie says that while the quality and scalability of Australian mines has enabled producers to hold their own in the challenging market and displace major competitors in the U.S., Canada and Indonesia, local miners are also helping to keep the market over-supplied, and prices down. Despite coal prices plunging over the last three years, there have been few closures and minimal impact to coal production, with Australian exports of metallurgical coal and thermal coal increasing by 14 million tonnes and 20 million tonnes respectively in 2014.
Patricia Mohr adds that in this difficult market, China remains all-important, as does Japan, for premium grade coking coal. “China is now 50 per cent of world carbon steel production.” In response to a question as to India’s potential, Mohr says, “Over time, India should be a growth market for coking coal as its own domestic steel industry moves ahead. There is a lot of potential in that market. It’s not quite there yet, but the Indians have very ambitious targets for carbon steel production and they have domestic iron ore. I think that maybe late this decade or next, the demand from India should be a lot stronger. It will be one of the growth markets in years to come.”
While Mohr is referring to metallurgical coal, used to produce steel, the International Energy Agency (IEA) reported in December 2014 that worldwide demand for thermal coal over the next five years will continue to grow, breaking the 9-billion-tonne level by 2019. Despite China’s efforts to moderate its coal consumption, it will still account for three-fifths of demand growth during the outlook period. Moreover, China will be joined by India, ASEAN countries and other countries in Asia as the main engines of growth in coal consumption, offsetting declines in Europe and the United States. Similar results came from BP’s Statistical Review of World Energy 2014 which reported coal’s share of global primary energy consumption in 2013 reached 30.1 per cent – the highest since 1970. Coal was also the fastest growing fossil fuel, with coal consumption growing by 3 per cent.
Governments move to reduce or eliminate coal’s emissions
It’s not just oversupply that is troubling coal. New environmental regulations in both Europe and the United States have had also had an impact on demand. In the U.S., while there are limits at coal-fired power plants for pollutants like arsenic and mercury, there have been no national limits on carbon. Power plants are the largest source of carbon pollution in the U.S., accounting for roughly one-third of all domestic greenhouse gas emissions. Over strenuous objections of the coal-fired power producers, the U.S. Environmental Protection Agency is using its authority under section 111 of the Clean Air Act to issue standards, regulations or guidelines to address carbon pollution from new and existing power plants, including modifications of those plants. The Act also establishes a mechanism for controlling air pollution from stationary sources.
The new Clean Power Plan will help cut carbon pollution from the power sector by 30 per cent from 2005 level, also cutting pollution that leads to soot and smog by over 25 per cent in 2030. European Union (EU) countries, driven by the 2009 Renewable Energy Directive which requires member countries reduce greenhouse gas emissions by 20 percent, produce 20 percent of total energy from renewables and decrease energy consumption by 20 percent. In Europe, these regulations have created a new and growing market for wood pellets to replace coal.
Canada’s much-praised contribution to reduction of carbon emissions was the 2014 launch of SaskPower’s Boundary Dam coal carbon capture and storage (CCS) plant. Boundary Dam integrates a rebuilt coal-fired generation unit with carbon capture technology, resulting in low-emission power generation. This is the world’s first post-combustion coal-fired CCS project, transforming an aging coal-fired unit into a reliable, long-term producer of 110 megawatts (MW) of base-load electricity, reducing greenhouse gas emissions by one million tonnes of carbon dioxide each year.
In a statement issued February 13, 2015, the World Coal Association called for greater investment in cleaner coal technologies, in order to meet growing global energy demand and reduce CO2 emissions. The Association cites IEA’s forecasts showing that coal use is set to grow by around 17 per cent in the next twenty years. “With 1.3 billion people globally without access to electricity, it is clear all sources of energy will be needed to meet this demand, including coal. Greater investment is needed in cleaner coal technology to meet global energy demand, alleviate energy poverty and minimize CO2 emissions.”
As China rebalances its economy and works to protect the country’s domestic coal miners, Wood Mackenzie expects China to be a major cause of depressed global import demand this year. The Company is forecasting thermal coal to average $US63 a tonne in 2015 and $US67 in 2016. The consultancy expects metallurgical coal to average $US116 a tonne this year and $US129 per tonne in 2016. But even in China, environmental issues will have an effect. With an increased focus on reducing environmental degradation, China’s National Development and Reform Commission has ordered the country’s power generators to cut coal imports by 25 million tonnes through the end of 2014 and into 2015. Woods Mackenzie says that uncertainty over China’s next steps is exacerbating the structural oversupply in seaborne coal markets and putting prices under pressure.