By R. Bruce Striegler
2015 was another tough year for both the thermal and metallurgical coal markets and, looking ahead, analysts are not expecting any dramatic improvements in 2016. Asian growth in demand for thermal coal is stalling at a time when capacity is abundant. A rebound in the near term is highly unlikely, and there is little doubt that overcapacity will continue for some time. Demand is set to rise in India, but with climate change concerns on the rise, and both metallurgical and thermal coal still in oversupply, it may still take a few years for the markets to rebalance. There is a global exodus happening in the coal industry. The boom in renewable energy, concern for the environment, and changes to energy infrastructures continue to reduce demand for thermal coal.
In June of last year, the nations that form the G7 (the U.S., Canada, Germany, France, the UK, Japan, and Italy) agreed to phase out the use of fossil fuels by the end of the century, in an effort to help reduce production of greenhouse gases. The seven leaders committed themselves to “decarbonize the global economy in the course of this century.” In practical terms, the leaders have committed to cut emissions generated mainly by the coal, oil and gas industries by 40 to 70 per cent by 2050 from 2010 levels. According to the International Energy Agency (IEA), global electricity from coal is expected to grow by around 33 per cent to 2040. Demand for coal in Southeast Asia alone is expected to increase 4.8 per cent a year through to 2035.
The G7 declaration prompted the head of the World Coal Association, Benjamin Sporton, to comment that, “Leaders of the G7 need to recognize that coal is playing a critical role in bringing affordable, reliable electricity to hundreds of millions of people in developing and emerging economies, particularly across Asia.” He added that, “Rather than wishing away fossil fuels, world leaders should be committing to investment in 21st century coal technology, high efficiency low emissions power generation and carbon capture, use and storage.” Coal is now used to generate 40 per cent of the world’s electricity, and its use has grown more than 50 per cent in the past decade, according to EIA. The U.S. is the world’s second-largest producer of coal, after China, followed by India, Australia and Indonesia. China is the world’s top importer of coal as well, followed by Japan, according to the World Coal Association.
New Chinese energy policies to reduce reliance on coal
Last year, China published its Energy Development Strategy Action Plan (2014-2020). The plan gives guidelines to reduce coal’s part in the country’s energy portfolio from its 2012 level of 66 per cent down to 62 per cent by 2020. There will also be a cap on total annual coal use at 4.2 billion tonnes until 2020. In China, while low domestic coal prices might allow the country to institute some desired power market reform, prices have fallen so low that domestic coal producers are in disarray. The government has intervened to protect the coal market because coal, despite planned reductions in consumption, will remain essential to China’s long-term energy security. The Chinese plan calls for an increase of non-fossil fuel energy from its 2013 level of 9.8 per cent to 15 per cent by 2020, and natural gas energy is expected to reach more than 10 per cent in that time as well.
Yet even if the oversupply problem is eventually solved, new policy measures, including those designed to combat air pollution will continue to slow coal consumption growth. A peak in coal demand is coming. Thus, as domestic coal delivery potential also improves, Chinese coal imports, once predicted to grow substantially, have now fallen from 208 million tonnes per year in 2014 to about 145 million tonnes in 2015.
World financial institutions drop support for coal plant construction
An increasing number of the world’s financial entities are backing away from coal industry investment as attitudes shift, given concerns about the impacts of coal consumption on climate change. In the U.S., President Obama pledged last June that the government would no longer finance overseas coal plants through the U.S. Export-Import Bank. Next, the World Bank, then the European Investment Bank, dropped support for coal projects. Those banks have pumped more than $10 billion into such initiatives in the past five years.
Among the three government-backed lenders, the World Bank has provided $6.26 billion for coal-related projects over the past five years, according to data from Oil Change International. The Ex-Im bank provided more than $1.4 billion to two coal projects, one in South Africa and another in India. While the pullback will not have a direct impact on China, the world’s top user of coal, it could curb construction of new plants in countries such as South Africa and Vietnam and dampen new export markets for coal mined in the U.S., Indonesia or Australia by companies such as Peabody Energy Corp. and Alpha Natural Resources Inc. After the World Bank dropped its support for coal projects, it did say it would help nations transition from coal to natural gas or renewables, and is still considering support for a coal project in Kosovo. And now China, which wants to export coal-plant technology, may ramp up support as well.
According to an analysis by the World Resources Institute (WRI) in Washington, 1,200 coal-fired plants are proposed globally, with more than three-quarters of those planned for India and China alone. If all are built, which WRI says is unlikely, that would add more than 80 per cent to existing capacity. WRI’s analysis notes there’s also the possibility that other lenders, especially export-credit agencies from Japan or China, could step in and replace the World Bank, and U.S. and European-based sources of export-support funding. Japan’s Bank for International Cooperation has provided more than $10 billion in financing for overseas coal projects, more than any other individual nation. On top of the decisions by global financial institutions, hundreds of other investors, including pension funds and universities around the world are divesting their assets in coal, oil and other fossil-fuel holdings.
India becomes coal’s bright spot
The positive news for seaborne thermal coal markets is India, where Prime Minister Modi has been successful in reinvigorating the economy. India and Japan are the largest importers of coal after China, and both are shifting their focus to other energy sources. India, unlike China, isn’t looking to cut its coal use. In fact, it’s planning to ramp up its domestic coal production in coming years. Its position as a net importer of often expensive coal from Australia is costing the country too much.
Interestingly, the stated government goal is the elimination of imports on the back of enormous production potential at Coal India. Some analysts believe that this goal will remain unmet given the poor quality of the domestic resource, and the continued expected delivered cost advantage of seaborne coal on a quality-adjusted basis. These analysts say that the result will be growing demand for seaborne imports by India.
However, renewable sources are moving in on this market, too. Rather than spend money to expand the fossil fuel electricity grids across the country to the 45 per cent of homes that aren’t connected, some energy experts suggest it may make more sense for India to install solar micro-grids to power remote areas. India added 4,089 megawatts of renewable energy capacity in financial year 2014-15, a capacity addition of 8.5 per cent more than the targeted capacity addition of 3,770 MW.
Coal’s decline hits Canadian mining sector
At the climate change negotiations in Paris, the Canadian government promised to produce a new climate plan within 90 days of the signing of the Paris Agreement. One of the focuses is expected to be tighter federal regulations for coal-fired power plants. Some provinces have made great strides already. Last November, the Alberta government announced an accelerated coal phase-out, pledging to eliminate emissions from coal-fired electricity by 2030. Alberta is joining Ontario, which announced in April 2014 that its Thunder Bay Generating Station, Ontario’s last coal-fired power plant, had exhausted its last supply of coal. Recently, communities in central Alberta failed to meet air quality standards set by the Canadian Council of Ministers of the Environment. The scientific evidence for the health effects of coal pollution is clear. Coal emits a toxic blend of chemicals, sulfur dioxide, nitrogen oxides, particulate matter 2.5 (very small chemical particles which can be absorbed into the bloodstream), mercury, polyaromatic hydrocarbons, benzenes and a host of substances that are hazardous to human health.
With coal gone from Ontario, air quality in the province has improved sharply over the last decade. From a peak in 2005, smog alert days have steadily declined to zero in 2014 and 2015. Toronto Public Health reported in 2015 that Ontario’s improved air quality prevents 400 deaths and 2,450 hospitalizations in Toronto annually. Coal-burning Saskatchewan, New Brunswick and Nova Scotia currently intend to have plants burning coal well into the 2040s. With Canada’s commitment to COP21, the UN climate agreement, it is expected by many that these provinces will soon seek alternates to coal. Canada consumed approximately 41 million tonnes of coal in 2014, 35 million tonnes of which was used for power generation. Canada’s coal consumption has decreased by 42 per cent since 2005, when the country used 60 million tonnes, 52 million tonnes which was for power generation. The decrease is a result of Canada, particularly Ontario, phasing out coal-fired power plants.
A 2012 report from PricewaterhouseCoopers (PwC) revealed that coal production in Canada delivers more economic and social benefits than expected. The PwC report found an economic contribution of $5.2 billion to Canada’s GDP. The industry is also a positive contributor to Canada’s trade balance and benefits to employment and communities. The Coal Association of Canada notes that over 42,000 people are employed by the coal industry, accounting for 14 per cent of total mining employment. Canada produced close to 67 million tonnes (Mt) of coal in 2012, consisting of 31 million tonnes of metallurgical (steel-making) coal and 36 Mt was thermal coal. The majority of Canadian coal produced in Canada was produced in Alberta and B.C.
Writing in the Canadian Mining Journal, Joe Aldina, Principal Analyst, Americas and Europe, for coal cost research firm Wood Mackenzie of New York says that even in depressed markets, Canadian coal continues to draw strong investment from abroad, as entrepreneurs and established companies alike recognize that Canada is well positioned for an eventual upturn in coal pricing. After setbacks at frontier coal projects in places like Mongolia and Mozambique, “Canada’s established regulatory framework, fiscal regime and reliable infrastructure are particularly attractive to investors.”
Aldina says that Canada’s world-class quality coal is well-positioned for further Asian shipments. “Your available port capacity and reliable rail infrastructure, experienced producers, and a currency exchange rate advantage, benefitting Canadian mines’ competitiveness in global markets, will help favourably position Canada’s export coal industry for the coming years as markets return to equilibrium.” He comments that a strong U.S. dollar has made the situation ever bleaker for U.S. coal miners and some of them will likely find survival difficult in 2016. “Though metallurgical and thermal coal markets remain in oversupply, we nevertheless believe that coal markets are cyclical and an eventual recovery in prices will materialize.”
Seaborne thermal coal demand will rise again
Aldina points out that while coal still reigns in Asia, he says that even there, non-coal power generation capacity will overtake coal-fired capacity in 2017 and will maintain that lead through 2035. “However, we believe that absolute coal demand will continue to grow to fulfill electrification potential in Asia. As a result, seaborne thermal coal demand will rise from roughly 940 Mt in 2014 to over 1,100 Mt in 2020 and prices will improve” Aldina says that like metallurgical coal markets, global thermal coal markets are facing extraordinary challenges driven by weakening global economic growth, a substantial overhang in mine and export capacity, volatile currencies in key supplier countries, and tightening environmental policies around the world.
The headline coal deal of the last several years was U.S.-based Westmoreland’s acquisition of Sherritt’s coal mining operations in April 2014, but a number of smaller deals have also been announced. These include the recent acquisition of Alberta’s Coalspur and Nova Scotia’s Donkin project by U.S.-based Cline Group, and the purchase of Grande Cache Coal Company by UpEnergy Development Group. Resource Capital Funds and Macquarie Bank also recently provided funding for the development of Riversdale Resources’ coal properties in the Crowsnest Pass area of Alberta. A further casualty of declining coal was Hillsborough Resources Ltd., a private mining company based in B.C., which announced in January this year it has suspended operations indefinitely at its Quinsam coal mine in Campbell River.
Since Canadian metallurgical export volumes equal roughly one-fifth of Australia’s, metallurgical coal from Canada provide Asian steel producers with a reliable alternative to Australian production. Aldina notes, ‘The importance of supplier diversity was underscored in 2011 when significant floods disrupted shipments from Queensland, forcing many coal buyers to seek new sourcing options.” It’s true that many new relationships were established with North Asian buyers keen on the quality and security of supply of Canadian metallurgical coal.
”We believe that Asian buyers place tremendous value on such relationships.” Aldina says, and adds that with the falling Canadian dollar and significantly lower diesel prices this year, the recently closed metallurgical coal surface mines in B.C.’s Peace River Valley are much closer to covering their operating costs, and could potentially reopen. This would be good news for Port Metro Vancouver which shipped more than five million metric tonnes of metallurgical coal to China in 2015, which was 29 per cent less than in 2014. Thermal coal exports to China, who have been aggressively transitioning to cleaner energy through the port, disappeared completely in 2015.