As the world’s fourth largest exporter of thermal coal, Colombia dominates the Latin American coal market – but opportunities exist elsewhere in the region. Both global production and consumption of thermal and metallurgical coal have increased over the past several years despite the global economic downturn. Owing to its outlook for continued – albeit slower – economic growth in the region over the next several years, Business Monitor sees positive fundamentals for the domestic coal industries for several countries.
At present, Mexico and Brazil have the largest domestic markets for coal. Demand for metallurgical coal in particular will grow, given the size of their domestic steel industries. Chile will also see demand for metallurgical coal grow in line with the development of its domestic steel industry, though not on the scale of Mexico or Brazil.
Business Monitor sees little potential upside for thermal coal consumption and production, however, as the region largely relies on a mix of hydropower, oil and gas for electricity generation. Coal still makes up part of the power mix in various markets, though its share of total electricity generation will fall through the decade.
Regional generation mix by type (TWh).
Thermal coal losing relevance
Growth in consumption of thermal coal in Latin America over the coming years will be tepid, as power consumption experiences modest growth of 4.1% over the longer term (annual average between 2014 and 2022), supporting economic and social development within the region. Thermal coal consumption will not be a growing part of the region’s energy mix, however, for the following reasons.
Firstly, the region relies relatively little on coal for electricity generation and its use will continue to decline as a proportion of total electricity generation into this decade.
Secondly, slower economic growth will curb the rapid expansion of the power generation base seen in recent years. Compared to both developed and developing regions, such as the US, the EU, India and China, Latin America as a whole is much less dependent on thermal coal for electricity generation. Rather, it largely uses hydropower, gas and oil. Countries across the region continue to invest in these electricity generation technologies. Thus, Business Monitor sees little room for growth in thermal coal use. Only in Mexico and Chile does coal make up more than 10% of total electricity generation but these shares are unlikely to grow.
Despite several power projects in the planning stage or under construction using coal or gas, Business Monitor forecasts hydropower to remain the dominant fuel for electricity generation in the region in the coming years (roughly 53% in 2022). While most of the countries’ power mixes will be dominated by hydropower, the notable exception – and a factor behind the regional rise in gas – will be Mexico. A plethora of new pipelines carrying US-sourced natural gas are coming online and US exports expanded 16% on average through the first seven months of 2013. According to the US Energy Information Administration (EIA), Mexico is planning to add a total of 28 GW of new gas-fired power capacity. Business Monitor forecasts reflect the pivot to natural gas in Mexico, with natural gas generation recording the highest year-on-year growth among all baseload fuels.
Mexico: gas-fired electricity generation and growth (%).
Growing access to cheap natural gas will see imported coal replaced with gas for electricity generation. Coal’s use in Mexico’s power generation mix will thus gradually fall over this decade and into next, from 11.8% of total generation in 2012 to 8.4% in 2022. In other Latin American countries, coal’s already small contribution to electricity generation will also lose even more share to hydropower, natural gas and renewables. In Peru, for example, the government is focusing on increasing gas production for use in electricity generation. Coal, on the other hand, accounts for about 2% of the country’s electricity generation and will hold at that level to 2022.
Business Monitor expects Latin America’s power consumption to grow by roughly 3.1% during 2013 – 1% lower than estimates for electricity consumption in 2012 and in line with the forecast for Latin America’s economic climate. That said, over the longer term, power consumption will experience modest growth at the 4.1% mark (annual average between 2014 and 2022), supporting economic and social development within the region.
Steel production to drive metallurgical coal demand
Metallurgical coal consumption will rise as regional steel output increases. This trend will be particularly visible in Mexico and Brazil, as well as to a lesser extent Chile and Peru, owing to coal’s use in steel production. Mexico and Brazil are the region’s two largest steelmakers and both will see solid growth in the years ahead on the back of expansion in their automotive, construction and infrastructure industries. Mexico, in particular, will outperform across these sectors, driving steel consumption growth of 5.3%/year on average through 2017.
Though Brazil’s steel industry has suffered lower equity valuations and financial pressure over the past few years, the country remains a major producer in order to meet domestic demand. Indeed, GlobalData forecasts positive – albeit modest – steel production growth of 3.5%/year on average to 2017. To meet steel demand, Brazilian steelmakers have been – and will continue to be – large net importers of metallurgical coal from the US, Canada and South Africa to feed its steel mills. Brazil’s domestic production came in at nearly 10 million t in 2012, though its consumption was more than double the amount. Indeed, the country accounted for 85% of the metallurgical coal imported in Latin America in 2012.
Written by Ben Kutler.
Read the article online at: https://www.worldcoal.com/mining/27122013/beyond_colombia_part_1/