The Economist Intelligence Unit (EIU) has released a special report, available for free download after registration, entitled: “Rock Steady: A Special Report on Coal Demand”, which provides a fairly benign outlook for Australian coal exports on the back of rising Asian demand (summary video above).
According to the EIU, global coal consumption rose by around 60% between 2000 and 2010, or 5% per annum, on the back of strong Chinese demand. However, in the five years to 2015, coal consumption is expected to grow by around 3.0% annually, again mostly on the back of continued growth in Chinese demand. China now accounts for roughly 50% of global coal production and consumption, double its share a decade ago, and displaced Japan as the leading coal importer in 2011 (see next chart).
The EIU does see coal demand moderating in China as the economy slows, electricity generation becomes more efficient, and concerns about pollution drive cleaner energy alternatives. Accordingly, “China’s consumption of coal [is expected] to grow by 18% during 2011-15, down from 46% in 2006-10” (see next chart).
The EIU also notes that slowing Chinese demand for coal is “not heartening news” for “foreign coal miners with businesses built on Chinese demand”, like Australia, which is “the second-largest coal exporter in the world”. However, it believes Australia’s “large coal industry is [still] well placed to export the commodity to Asia”.
As noted previously, I am not as sanguine about Australia’s thermal coal prospects, which are facing increased competition from US coal exports, due to domestic coal-to-gas switching arising from the US shale gas boom, as well as increasing competition from from Indonesia, which is the world’s biggest coal exporter (see next chart).
Exports from the United States rose by more than 50% in the first half of 2012, after almost doubling over the previous two years from low levels, as domestic energy demand shifted to gas. The reduction in demand for coal in the United States also meant that US imports of coal declined. In response, countries that exported to the United States, such as Colombia (which had supplied around 80% of US thermal coal imports in 2011), have also increased their exports to other countries.
In Indonesia, coal exports have expanded rapidly over the past few years driven by high rates of investment in resource extraction. High levels of resource investment have also taken place in Australia, predominantly at the Port of Newcastle, which has supported growing coal exports, as have shipments from major exporters such as Russia and South Africa, which supply both the Atlantic and the Pacific markets.
In short, rising global supplies are pushing against slowing demand, which points to an ongoing moderation of coal prices. And Australian coal exporters are likely to be hard hit from any price falls because they have the highest marginal cost, according to Deutsche Bank:
Australia would be the hardest hit of any coal exporters because it has the highest marginal cost.
At $87/tonne, some 43 million tonnes of export production from Australia would be forced offline, and investments in Queensland’s Galilee Basin, such as the massive GVK Alpha coal mine part owned by Gina Rinehart, would be delayed. At such prices, these projects would not be profitable, and could not attract finance. It would also have significant profit impacts on current operations for Anglo American, BHP Billiton and Rio Tinto.
At $87.21 as at end-April (see below chart), Australian thermal coal prices are already touching levels where marginal producers could soon be forced off line and mining capital expenditure threatened.
Further price falls could, therefore, prove highly problematic for the Australian thermal coal industry, placing additional downward pressure on employment.
