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Grim and grimmer: Analysts deliver double blow to coal

The outlook for coal just gets grimmer with new research out by Goldman Sachs and Bloomberg New Energy Finance
BNEF has released an updated five-year outlook for the US power sector which indicates that the United States will resume the downward trajectory in coal consumption in 2015. What’s quite incredible relative to Australia (where coal power stations at least until recently seemed to be almost immortal) is that they expect the US to shut down 23 gigawatts of coal power plant capacity this year, which is a staggering 7% of US total installed coal capacity.  This is because a new Mercury and Air Toxics Standard will take effect next week on 16 April. This has acted to bring to a head the demise of aging power plants, with owners unwilling to invest substantial funds to control their air pollutants. On top of the 23GW of closures they expect this year will be a further 30 gigawatts shut before 2020.

In addition BNEF is predicting 2015 to be a record year for renewable energy capacity additions. In all, 18.3GW will be built (the prior record was 17.1GW in 2012) composed of 9.1GW of solar (highest ever) and 8.9GW of wind (third highest year). 

Partly offsetting the emission reductions from coal closures is that BNEF expect the power sector to consume a record amount of gas in 2015. According to BNEF coal is being squeezed at two ends. On one side cheap prices for gas mean efficient combined cycle gas plants in several regions have marginal costs competitive with coal plant. At the other end, EPA air pollution standards are forcing old coal plants to retire while preventing new coal plants from being built.

The end result of this shuffling of power plants and fuel is embodied in the three charts below. The chart on the left shows it’s not all gas that’s squeezing coal with light blue renewables making in-roads too, although there’s a long way to go for renewables. The final result on the right hand chart is that coal burn is on a downward trajectory, although carbon emissions are not declining quite as fast because gas burn is replacing some of that coal.

Moving our gaze closer to home, Goldman Sachs analysts Christian Lelong and Amber Cai have looked at the puzzling phenomenon where coal mine production cutbacks in places like Australia focused on the Asian seaborne coal market have failed to generate a sustained rise in the thermal coal price.

The analysts note that production cutbacks in Australia and South Africa as well as supply disruptions in Columbia managed to lift the Newcastle coal price index by 11% to US $69/t, but this proved short-lived and the price is now at a multi-year low of US$57/t.

They note that the reason comes down to interlinkages between the relatively small seaborne coal market which Australian exporters depend upon, and the vast Chinese domestic coal producers. At present China imports coal from the seaborne market – but one needs to keep in mind the level of imports are small relative to the overall size of Chinese domestic coal production. The Chinese domestic coal market is four times larger than the entire seaborne thermal coal market serving not just China, but Japan, Korea, Taiwan, India, etc. 

With the Chinese Government rebalancing the economy away from energy-intensive industry, and encouraging energy efficiency and renewable energy to curb pollution expected demand growth for coal has suddenly evaporated. This has left the vast Chinese coal production companies such as Shenhua with excess capacity.  Consequently any cutbacks in coal production by Australian producers can be easily covered by what is a relatively small expansion in China’s own coal production.

The end result is that companies like Glencore and Rio Tinto are almost impotent in being able to push up seaborne market thermal coal prices by cutting back their own production. According to Lelong and Cai, this is likely to remain the case until China ultimately stops importing coal altogether – which in itself is hardly a good news story for Australian coal exporters.

source: https://www.businessspectator.com.au