What next for coal?

In the past few years, many factors have contributed to the struggles the coal industry has faced. Coal prices have plummeted, as demand has shrunk, and the industry has struggled with large global coal production cuts and accelerated mine closures.

China’s coal consumption in particular has fallen in recent years. Continuing declines in Chinese imports have left the industry in uncertainty. Will, for example, growing Indian consumption offset China’s attempts to move away from coal?

The 35th Coaltrans World Coal Leaders Network took place on 18 – 20 October in Barcelona, Spain, bringing coal industry professionals together from around the world to try and answer some of these questions.

The conference also boasted a relaunched format focused on interaction between speakers and delegates, including an Oxford-style debate, CEO interviews hosted by BBC presenter, Gavin Esler, and round-table discussions.

Outlooks and prices

Much talk among conference attendees focused on the near-term future. Fabio Gabrieli, Director at Mercuria Energy Trading, started the discussion on day one, looking at global seaborne trade dynamics, as well as providing a market outlook for 2016.

According to Gabrieli, Chinese coal imports peaked in 2013. Suppliers’ reactions to this have included Australia diversifying the markets for its over the last two years, South Africa switching back tonnes to the Atlantic to find new markets, such as Egypt, and Russia dumping coal across the world.

Gabrieli forecast that, while Chinese imports may falter further in 2016, there will be positive demand growth in Asia – but not in the Atlantic. Indeed, ex-China, there is likely to be growth in the seaborne coal market with India expected to increase its imports by 20 million t, Taiwan, Korea and Japan demand totalling at least 80 million t, and the rest of Asia seeing at least 6 million t growth.

Adding to this more positive picture, Guillaume Perret of Perret Associates indicated that the industry is entering a new cycle where coal volume is going down, as unsustainable and unprofitable mines close. Many mining companies have tried to delay this but “we are now coming into the crunch time.” He explained: “We see a serious rebalancing of the market in terms of production, imports and exports. But the coal market still remains open to new shocks and these probably will come from another sharp decrease in oil prices and the currency effect.”

Steel a good investment?

Vera Blei, Editor of Steel First, discussed World Steel Forecasts and explained that steel demand is predicted to fall. She indicated that positive places for steel growth are in India and Mexico; however, the volume figures are relatively small on demand basis. Even in developed markets, such as the US, there is expected negative growth. Asian countries (e.g. Japan and South Korea) also expect to show negative growth. Excluding China, however, overall global steel demand is expected to marginally increase in 2016.

Ted O’Brien, CEO, Doyle Trading Consultants, was skeptical to call the bottom in metallurgical coal prices but added that certain conditions now existed that could point towards a bottom, such as global supply cuts – not just in the US but also Australia and Canada – weak demand this year (down 1.6%) and that “coking coal is hanging in there at US$80/t in this environment could indicate we are at a bottom.”

O’Brien concluded his outlook by saying that “there is without a doubt a greater upside for prices than downside risk. I think potential supply disruptions could happen. It is a short-term gain instead of a long-term structural production cut that needs to happen.” O’Brien underlined foreign exchange, a weakening instead of growth of steel consumption and India using electric arc furnaces, which are not metallurgical coal intensive, as major risks in metallurgical coal pricing.

Coal-fired power: risks from competition

During the two day conference, it became clear many were in agreement that emissions regulations, competition from gas and further investments in alternative energy sources are going to affect coal and its prices. But to what extent and the industry’s reaction to this was debated and predicted.

An increase in gas as a competitor seemed to echo throughout the conference, with LNG export ports awaiting approval in the US and gas producing more electricity than coal this year in April in the US.

Trevor Sikorski, Director of Energy Aspects Ltd, highlighted the biggest risk to the coal industry to be the carbon and gas nexus: the increases in carbon prices teamed with a restructuring that could see significantly cheaper gas prices. It could in turn lead to not only coal versus coal competition but also coal versus gas competition. Sikorski stated: “the big question for coal is do we price ourselves down to maintain market share and power or do we get priced down by gas and become the marginal rather than the baseload fuel?”

In discussing a three month spot coal price forecast for the coal market, Perret touched on how competition could affect coal. In certain parts of Europe, particularly in the west, there is an increasing switch from coal to gas. However in places such as Turkey, Egypt and India, Perret sees a decline in gas-fired generation and increases in coal-fired generation. With imports in structural decline, “the UK is turning to gas, France is using nuclear generation and US using shale gas to replace coal. Yet if a country does not have shale, nuclear or cheap gas, the war on coal becomes more complex.”

Generation from renewables is increasing and, while they are not a baseload fuel and are more expensive than other forms of energy, they are being used in certain countries as alternatives and this makes coal volatile. How volatile renewables make coal is questionable, as renewables have been heavily subsidised and these subsidies are being cut down and this could leave renewables without investment for additional capacity.

Perret indicated a combination of coal with renewables could give interesting results as it could lead to pushing gas out as a main competitor since the price difference between the two plants is signifcant. Using coal in combination with renewables, while adding to costs, it is still cheaper than gas and has reduced emissions.

Production cutbacks

Mine closures have also heavily impacted the coal industry. Struggling companies are filing for bankruptcy – particularly in the US with 26 coal mining companies filing for bankruptcy and 411 mine closures.

The US is the high cost supplier and is expected to have cuts over a few years yet. Doyle Trading Consultants’ O’Brien highlighted that many coal producers are going through this restructuring and this is projected to lead to price cuts and many mine closures with no prospects to open again. In turn, this could lead to a bottom pricing in metallurgical coal.

Robert Murray, CEO of Murray Energy, indicated that with the recent struggles facing many US mining companies, only two in their current form – which he hopes Murray Energy to be one of them. He forecasts the downturn will last until 2017 will be earliest it will get out of the current low. Murray emphasised that the rapid mine closures and subsequent reductions in thermal coal production will lead to the poorest sector of the US population suffering – with double digit electricity rate increased expected under the Clean Power Plan by 2020 in some 40 of the 50 states.

In terms of European thermal coal mine closures, Matthew Boyle, Principal Consultant at CRU, indicated this could lead to more imports to Europe as he expects certain countries, such as Poland and Spain, will continue to use coal as its main fuel.

Emission regulations

Emission regulations have been limiting coal, impacting its usage and hindering its future potential. For example, the EU has binding regulations to cut emissions. EU power plants have challenges ahead due to meeting these rules. The difficulties in attaining these standards will lead to a fall in coal-fired power generation in Europe through to 2020 according to Boyle. Retrofitting the plants that are nearing the end of their life span with emissions reduction technology is considered too expensive. Nevertheless, it was questioned by the audience whether the threat is the market and not legislation.

With outlooks taking into account the effect of emission regulations, the looming COP21 talks in December were touched on throughout the conference. A more pessimistic outlook on the December talks came from Robert Murray, who said that “nothing will happen other than words”.

Others saw the glass half full, such as Sikorski, who explained COP21 would not change the spread of global coal pricing, but it will set a framework for countries where they can monitor, report and verify how a country is doing and in turn pressure can be put on certain countries to do more. This is where additional emissions polices will be introduced particularly in the power sector. This could have major implications on coal-fired power.

Is investment in technology the answer?

In attempts to keep coal within emission regulations and standards, many have turned to clean coal technologies to improve efficiency as a way forward. The conference highlighted that these technologies have a long way to go before they can help the coal industry on a global scale.

Anne-Sophie Corbeau, Research Fellow at KAPSARC, emphasised this by stating CCS needed to be proven on a large scale before it can be known whether it will help the coal industry. Many believe investing in this will be the way forward for coal to overcome emission hindrances. Boyle emphasised there is still investment in coal-fired power in Europe but only if the technology is there to reduce emissions.

On the other hand, Murray made it clear he and his company are not interested in CCS by referring to it as a myth and a pseudonym for ‘no coal’. He went on to say that the technology for CCS is there, but the problem is with sequestration. It presents too many difficulties (practically and economically) and therefore he believes it will not happen in the US.

Conclusion

While competition heightens and various constraints hinder coal prices and coal power expansions, it is widely agreed coal is set to stay in the energy mix for a long time to come because there is no alternative solution that can provide reasonably priced electricity and no solid replacement for steel making.

The future for coal seems to lie in Asia. Gabrieli’s outlook indicated Pacific demand will continue to increase and Atlantic demand is set to continually decline as result of weak demand – not a shortage in supply.

The conditions that determine coal’s market position are continuing to be increasingly tougher. Coal’s light is still burning, it is just a bit dimmer, as Boyle pointed out.

Written by Harleigh Hobbs.

Read the article online at: https://www.worldcoal.com/special-reports/28102015/what-next-for-coal-coaltrans-world-coal-leaders-network-3078/