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China’s thermal coal demand expected to grow

World Coal,

Wood Mackenzie's report, China: The Illusion of Peak Coal, predicts that despite efforts to limit coal consumption and seek alternative fuel options, the country’s strong appetite for thermal coal will lead to a doubling of demand by 2030. China’s demand will grow to approximately 7 billion tpa of thermal coal. This figure is contrary to speculation that China's thermal coal demand may reach a peak in the next decade.

"It is unlikely that demand for thermal coal in China will peak before 2030," states William Durbin, Wood Mackenzie’s Beijing-based president of global markets. "China’s aggressive investment programme for nuclear, natural gas and renewables capacity is centred in the coastal region, while coal-fired capacity grows in the central and western provinces. Indeed, there are also a plethora of coal-intensive conversion projects being built or planned, which are significantly adding to demand.”

The analysis already takes into account a rapid improvement in energy efficiency. The forecasts predict power demand per unit of GDP to fall by half within 17 years. In spite of this efficiency improvement, power demand is still set to nearly triple to 15,000 TWh by 2030.

Coal is an important natural resource for a number of provinces seeking investment, jobs and tax revenues. Government-approved coal conversion projects (coal-to-gas, coal-to-liquids, coal-to-petrochemicals), account for over 0.25 billion tpa of thermal demand. There are also planned projects that will increase demand by another 0.6 billion tpa. Mr Durbin notes, “Total Chinese industrial demand for thermal coal is expected to grow from 1.5 to nearly 2.1 billion tpa by 2030. In comparison, the US consumes only 1 billion tpa in total. If a cap on coal consumption in China is imposed, it will come at a cost to provincial economies.”

In order for China to reduce power-driven demand for coal, a significant increase in the availability of natural gas for the power and industrial sectors is required. However, Wood Mackenzie believes natural gas supplies will struggle to meet growth in demand, due to modest investment in conventional reserves and the slow development of domestic unconventional shale gas reserves. Additionally, the high cost of LNG and pipeline imports is uncompetitive with low cost coal.

China’s gas price and power tariff regulations will need to be reformed in order to create incentives for the national oil companies (NOCs) to make expensive investments in unconventional gas. Mr Durbin highlights, “Our analysis already assumes an intensive investment programme in unconventionals post-2020. To ramp up shale gas developments and production faster to displace coal will require a near-doubling of investment. We expect coal to hold its cost advantage until shale gas breakeven costs fall by 40-50%."

Aside from coal substitution by natural gas, China hopes to reduce coal usage in the coastal demand centres by building Ultra High Voltage (UHV) electricity transmission lines from the Northwest and Southwest. The report, however, suggests this will have a limited impact on coal demand. The transmission lines from the northwest will transmit coal-fired generation; thereby moving coal demand from the coast to the interior. The UHV lines from the southwest will transmit seasonal hydro, requiring base load coal when hydro output falls. The net effect of the UHV lines and the non-coal-fired capacity is a flattening in thermal coal demand in the coastal power region.

Mr Durbin concludes, "Government mandates to improve the environment by reducing coal use will require steep investments in alternatives, the use of emission control technology or the reduction of economic growth rate targets further. There is greater potential for further demand growth beyond our expectations. Failure to meet an aggressive non-coal power capacity build, investment in more efficient technologies and the expansion of the UHV network will increase the dependence on and use of coal. China's thermal coal demand will see persistent growth until 2030, rendering peak coal an illusion.”

Adapted from press release by Samuel Dodson

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