Coal, our new black gold, ready to give oil the slip
On Tuesday the International Energy Agency predicted coal could overtake oil as the world's biggest energy source by 2017. If anything, the IEA is being conservative.
In October Greg Boyce, chief executive of America's largest coal company, Peabody Energy, told investors coal would overtake oil next year, citing as-yet-unreleased analysis by respected global energy consultants Wood Mackenzie.
Wood Mackenzie would not comment this week but confirmed that the prediction - given in a closed-doors briefing - would be contained in future reports.
At the Australian Institute of Energy's conference in Sydney last month, Peabody government relations executive Brendan Pearson reminded the audience the IEA's forecasts had been wrong before. In fact, the IEA, whose annual World Energy Outlook is handed down each year as though written in stone, had failed to predict the coal boom this century.
In 2000-01, Pearson said, the IEA predicted coal use for the next decade would grow by less than 1 per cent a year. Instead it grew by 56 per cent, he said, "faster than gas and oil combined".
"Over that period we've seen an expansion of Australia's output of 33 per cent, in Indonesia, more than 300 per cent, and in China, 180 per cent.
"I'm not having a crack at the IEA," he added, saying it was simply reflecting consensus at the time. But it was wrong nonetheless.
Given it was an explosion in Chinese energy demand that made the difference - turning the nation from an exporter to the world's largest importer - Pearson also cautioned against over-reliance on China's own forecasts. "In the two five-year plans that have been published between 2000 and 2010, the actual consumption overshot both times, by a combined margin of 2.2 billion tonnes."
Chinese imports had risen sixtyfold in the past decade and the country now used more coal than the next 16 major user nations.
Peabody, which acquired Macarthur Coal in 2010 and now makes half its money in Australia, forecasts world coal demand will rise by 1.3 billion tonnes over the next five years, primarily in China and India and primarily for power generation. The seaborne trade would experience about 8 per cent compound annual growth.
The IEA this week acknowledged the rise of emerging markets had "relentlessly driven coal demand higher over the past decades. Whereas climate policy and macroeconomic slowdown were expected to slow that increase, it took the shale gas glut in the United States to curtail coal demand growth there. Yet, thanks to more regional integration in coal markets, European coal prices have been more responsive than gas prices, bringing coal back to Europe.
Both coking and thermal coal prices have fallen this year, for different reasons, but commentators are now talking about some recovery. In the case of coking coal, the price premium forced by supply interruptions in Queensland, due to the 2010-11 floods, and softening demand from Chinese steel mills, have brought coking coal prices back to below $US200 a tonne.
Thermal coal prices have fallen by about a third this year, due partly to oversupply as American coal hit export markets, and were hovering around $US90 a tonne before a modest rise in recent weeks. The Commonwealth Bank is now predicting a rise to between $US95 and $US100 a tonne over the next two quarters.
Weighing on thermal coal markets, in particular, has been the prospect that America's unconventional gas boom would be quickly replicated in China, which has vast shale gas potential.
But Citi analysts this week wrote that while promising shale gas fields exist "early evidence indicates China will need to drill more wells with longer reach to achieve productivity similar to the US".
Coal would remain a cheaper fuel than gas for a generation.
The only near-term risk to coal earnings, according to Citi, was excess supply.
Even if prices stay low relative to recent peaks, the amount of coal mined just keeps rising. As IEA executive director Maria van Der Hoeven told journalists this week: "For the moment, let's be honest . . . regulations on the climate . . . have no effect, have no influence on coal production and on coal use."
According to the IEA, coal use will grow over the next five years, even if Chinese economic growth halves. Even the scenarios used in the latest World Energy Outlook, which factored in carbon prices, showed coal use would continue to grow.
Frequently Asked Questions about this Article…
The International Energy Agency (IEA) warned coal could overtake oil as the world’s biggest energy source by 2017. Industry figures, including Peabody Energy’s chief executive and analysts at Wood Mackenzie (referenced in closed briefings), have made similar or even earlier forecasts based on rising demand in emerging markets.
Analysts point to rapid growth in emerging markets—especially China and India—driving power-generation demand. The article notes historic underestimates of Chinese demand, big increases in national output (for example Australia, Indonesia and China), and Peabody’s forecast that world coal demand could rise by about 1.3 billion tonnes over the next five years, lifting seaborne trade at roughly an 8% compound annual growth rate.
Both coking and thermal coal prices fell over the year cited. Coking coal dropped due to weaker Chinese steel mill demand and is reported back below US$200 per tonne. Thermal coal fell by about a third to around US$90 per tonne before a modest recent rise; the Commonwealth Bank predicted thermal coal could reach about US$95–100 per tonne over the next two quarters.
The US shale gas glut curtailed coal demand in the United States by making gas cheaper for power generation. Analysts caution that while China has large shale gas potential, Citi says early evidence suggests China would need many more and longer-reach wells to match US productivity—so coal is likely to remain a cheaper fuel for generation in the near term.
The article highlights excess supply as the primary near-term risk to coal earnings. Even if prices remain below recent peaks, mining volumes have continued to rise. Other influences include regional price responsiveness, short-term weather or supply interruptions, and macroeconomic slowdowns. The IEA also commented that current climate regulations have had little influence on coal production and use in the near term.
Key voices mentioned include the International Energy Agency (IEA), Peabody Energy (which acquired Macarthur Coal and derives a large share of revenue from Australia), consultancy Wood Mackenzie (referenced for analysis), Citi analysts (on China’s shale prospects), and the Commonwealth Bank (on short-term thermal coal price forecasts).
China is central to global coal dynamics. The article says Chinese imports rose sixtyfold over a decade, China now uses more coal than the next 16 major users combined, and past Chinese consumption regularly outpaced official five-year-plan forecasts—making China the dominant driver of global coal demand.
Investors should track Chinese and Indian power-generation demand, coking vs thermal coal price trends, seaborne trade volumes, signs of excess global supply, developments in shale gas (especially in China), analyst forecasts from bodies like the IEA and major banks, and any meaningful regulatory shifts on carbon or emissions that could affect longer-term demand.
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