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A sea change for the coal market

The coal market is undergoing significant change, with global demand stalling after a decade of aggressive growth. Preliminary official data indicate that Chinese coal demand declined in 2014, a reversal that looks to have accelerated in 2015. Amid oversupply, prices have plunged, while the COP21 climate accord commits governments to reducing greenhouse gas emissions. The IEA has slashed its five-year estimate for coal demand but still sees a rise. IEA Senior Coal Analyst Carlos Fernández Alvarez, principal author of the new Medium-Term Coal Market Report, looks at the major factors influencing the market. 

Senior Energy (Coal) Analyst in the IEA Gas, Coal and Power Markets Division

What are the biggest changes affecting the coal market?

The two most significant developments at present are the dip in Chinese demand and low prices.

Coal prices have been declining since the start of 2011, making every month more difficult for struggling producers. Bust and boom cycles are common in commodities, and high prices and expectations of relentless Chinese growth triggered investments earlier this century that resulted in the current oversupply. Exacerbating the situation are the shale gas revolution, which cut coal demand and prices in the United States, and take-or-pay contracts for rails and ports in Australia. Additionally, currency depreciations in major coal-exporting countries and low oil prices (important in mining and transportation costs) have further depressed prices.

And one reason no recovery is seen soon is the halt in Chinese coal growth. Based on preliminary data and thus subject to revision, Chinese coal use decreased by 2.9%, or 116 megatonnes (Mt), in 2014, the first decline in this century, with preliminary data for 2015 indicating that the shift will be even more pronounced for this year. In a country that consumes 4 billion tonnes of coal annually, the picture is very complex, but I would remark on two major drivers of this decline. First, electricity demand grew by only 3.8% while gross domestic product (GDP) grew 7.4%; previously, China’s economic and power-demand growth ran at roughly similar rates. Second, in 2014 hydropower generation was exceptionally high because of both capacity additions and seasonal effects, reducing coal-fired generation and thus consumption of thermal coal.

But the bigger picture is that we are seeing structural change in the Chinese economy, with growth increasingly driven by the service sector and less energy-intensive industry. Whereas a rebalancing process is normal in a maturing economy, the question is how fast it will happen in China. Our new Medium-Term Coal Market Report 2015 assumes a moderate rebalancing of the Chinese economy in the next five years and consequently a return to a closer correlation between GDP and electricity demand than in 2014. Based on that assumption, growth of Chinese coal demand levels off in the medium term.

But the report also has an alternative China Peak Coal Scenario in which we assume stronger growth in the commercial sector and lower growth in industry, which consumes a large share of electricity. In this scenario Chinese coal demand already peaked in 2013 and continues to decline until 2020. The total difference in Chinese coal consumption between the two scenarios is roughly 300 megatonnes coal-equivalent (Mtce), or more than China imported in 2014.

The slowdown and rebalancing of the Chinese economy – or even the US shale gas revolution – has had a bigger impact on coal demand than, for example, the EU Emissions Trading Scheme.

Coal has been the fastest-growing fossil fuel in recent years. Will this continue?

With Chinese consumption slowing or even declining over the next five years, demand growth will be driven mainly by other Asian countries such as India and ASEAN members. In these countries, electrification and urbanisation of a large population will drive increased power demand, and coal and renewables – especially in India – will cover a significant part of this growth. But it is important to note that these countries play at a different scale than China, whose coal market is approximately four times bigger than that of India and ASEAN combined.

Therefore, the main forecast in Medium-Term Coal Market Report 2015 sees 0.8% demand growth worldwide to 2020. 

Does this mean that climate policies are affecting coal demand?

There is no doubt that coal demand would be higher without environmental policies – which include air pollution regulations that sometimes are more effective at curtailing coal demand than policies aimed simply at reducing greenhouse gases. But the slowdown and rebalancing of the Chinese economy – or even the US shale gas revolution – has had a bigger impact on coal demand than, for example, the EU Emissions Trading Scheme.

Medium-Term Coal Market Report 2015 sees coal retaining its significant role in the energy mix even as the world works to reduce greenhouse gas emissions. More than 41% of global electricity comes from coal. The report sees that share falling to 37% by 2020 – but because total generation increases, the amount of coal burnt still rises. So, how to stem emissions? Use coal more efficiently. For instance, generating 1 megawatt-hour (MWh) of electricity from coal can emit more than 1 tonne of CO2 in an inefficient plant, 750 kg in an efficient plant, less than 500 kg in a plant with partial carbon capture and storage (CCS), or less than 100 kg in a plant fully equipped with CCS.

Therefore, the IEA believes that if we are to meet our climate targets, it is crucial that we phase out inefficient coal-fired plants and build no new plants that are not efficient, and that we also develop and deploy CCS.

That said, CCS is progressing slowly, although more than 10 large-scale projects are under development. The IEA has long maintained that we need stronger efforts to develop CCS. Our long-term analysis shows that decarbonisation is much cheaper with CCS than without CCS, and this should be a reason to accelerate CCS.

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