In the last couple of Editor’s Comments, I have been relatively bullish about the future of coal, quoting a range of studies that highlight the important role coal will continue to play in the global energy mix. This remains the case: the current downturn in the industry should not be mistaken for an existential threat. But the difficulties the industry faces – and will continue to face in 2014 – challenge certain basic assumptions the coal industry has relied on in recent years.
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Firstly: China. As a recent report by Citi Research - revealingly entitled The Unimaginable: Peak Coal in China – said: “For the last decade, one of the most unassailable assumptions in global energy markets has been the ever increasing trajectory of Chinese coal demand.” But the coal industry may now have to accept that China’s demand for coal may not continue to grow as dramatically as previously throught. A slowdown in GDP growth and structural changes in its economy look set to result in weaker demand for power (and thus coal). Deutsche Bank - another organisation that is questioning coal’s role in China - expects demand for power to grow by only 7 - 8% over the next five years, compared to 11% in 2005 - 2010.
The Chinese Government has also announced measures aimed at curbing coal consumption as a percentage of energy use, while Chinese coal-fired power plants are improving efficiency standards (requiring less coal to produce the same amount of power). This last fact alone could knock 1 - 1.5% off coal consumption growth in coming years, according to Deutsche Bank’s analysis.
China will still need coal: that is not in doubt. But the growth of its demand may not be as dependable as thought (although there are still many voices that predict otherwise). And in the short-term, China will not provide the sort of demand required to soak up overcapacity and support a rise in prices in 2014.
Secondly: the dominant role of coal in the US power industry. The impact of ultra-cheap gas in the US has hit the US coal industry hard and will continue to do so – possibly through the rest of this decade. EY has estimated that US demand for coal will be 20% lower between 2010 and 2020 than would have been the case without the shale gas bonanza. It seems likely that a long-term decline in coal use in the US is now underway. Exports may offset some of this but the US will face stiff competition from other producers, as demand remains weak for the foreseeable future. And if environmental campaigners are successful in blocking the development of coal export terminals on the West Coast, exports will struggle to grow beyond the 125 million t recorded last year.
The coal industry is facing a different future to the one predicted 2 - 3 years ago - a future with more competitors, less-certain demand and more intense opposition. It still has a place - a critical place - in the global economy. But if the last few years have taught us anything, it is that nothing is sacred. We now live in a world in which Europe is burning more coal; the US, less; and China talks of implementing a national carbon price. The world has changed.