WoodMac expects slower growth in China coal demand

Last year was a significant year for energy commodities in China, according to a news release from Wood Mackenzie (WoodMac), an energy market research company, as commodity demand growth decoupled from GDP growth for the first time.

“Over the past two decades, commodity demand growth had maintained relatively proportionate annual increases to GDP growth,” said WoodMac. “In 2014, however, the pace of power, gas, coal and diesel demand increase fell more drastically than the slight GDP moderation.”

The company now expects demand for power, coal and diesel to see their outlook change notably over the long-term due to major structural changes in the economy and policy: “The Chinese government is moving away from the post-2008 investment binge and gradually moving towards a more moderate but sustainable consumption-led economy,” said Cynthia Lim, Principal Asia Economist for WoodMac.

“There are two aspects of rebalancing,” continued Lim. “One, away from investment towards consumption, particularly in the developed coastal region; and two, a shift in economic gravity away from the coast and towards the inland region. Both trends will have significant implications on commodity demand shifts. An important indicator for the energy industry to watch will be the weakness of industry versus the strength of the consumer in China.”

In the coal industry, the pace of annual growth has slowed, particularly in coastal markets with new-zero growth in demand for power generation. “Coal remains king in China but growth has been severely reduced due to industrial weakness, as well as cyclical weather patterns that saw higher rainfall boost hydro output,” said Gavin Thompson, Principal Analyst for APAC Gas & Power Research.

“Through the short term, coal-fired generation will likely be muted by lower power demand, environmental polices and a rise in non-coal generation, including hydro. Longer-term, coal demand pace and patterns will be impacted by structural changes with demand rising fastest from inland provinces and the acceleration of ultra-high voltage transmissions lines to export power to the coast,” Thompson continued.

Lim concluded that the recovery in demand for power, coal and diesel will be closely tied to industrial demand. “While these commodities will experience a moderate recovery in the medium term as overcapacity is reduced, the ongoing transition of China’s economy away from an industry-led model suggest their relationship with GDP growth will weaken permanently in the longer-run. As a result the energy sector must keep attuned to both China’s underlying changes and also short-term developments to position itself for the changing opportunities the market offers.”

Written by Jonathan Rowland.

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