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Vilified as a dirty energy source in advanced industrialized economies, coal is booming around the world. Emerging economies are the critical driving force behind the continued growth, but barriers do exist.
By James Wellstead – Exclusive to Coal Investing News
Often seen as a ‘dirty’ energy source high in greenhouse gas emissions, coal’s consumption has been on a downward slide in many advanced industrialized countries over the past three decades. The story in emerging economies, however, could not be more different.
Worldwide, as the world’s number one source of electricity production, thermal coal now accounts for about 30 percent of global energy use, the highest level since 1970. With over 3.55 billion tonnes oil equivalent (BOE) consumed in 2010, world coal consumption has grown by over three percent annually since 2002.
This reality can almost solely be attributed to the massive industrial and economic growth witnessed in the Asia Pacific region.
China’s coal consumption growth alone, the driver of world coal consumption trends, has increased by more than 180 percent since 2000. And with 1.713 billion tonnes oil equivalent consumed in 2010, China represents 46 percent of total world consumption.
India has also seen rapid increase in consumption as demand growing by 10 percent annually in recent years buoyed by an economic growth rate averaging 7.45 percent between 2000 and 2011. And South Africa and Indonesia continue to post significant consumption numbers, due in part to their large domestic supplies.
Currently, China and India rely on coal-fired power plants for more than 80 percent of the electricity production – more than 90 percent in South Africa – a statistic unlikely to change as these countries continue to build out coal-burning capacity with an average plant life of 40 years.
Hurdles to growth
Despite persistent demand, barriers to growth appear to be presenting themselves. Both China and India are finding it harder to pass higher coal prices on to utilities as political and social priorities take precedence power suppliers’ bottom line.
Unlike in the past, Chinese coal companies are now much more open to foreign investment. The China National Coal Import and Export Corporation acts as the primary Chinese partner for foreign investors in the coal sector with the goal of modernizing existing large-scale mines and bring new technologies into China’s coal industry.
But integration into foreign coal markets has also raised problems recently for Chinese power plants. Facing the smallest profit margins in at least five years, coal costs now account for more than 95 percent of the wholesale electricity price at benchmark plants according to data compiled by Michael Parker, a Hong Kong-based senior analyst at Sanford C. Bernstein, last November.
Ever since the 2008 commodities price correction, thermal coal prices have been on a steady upward trend, while the Chinese government has been unwilling to let electricity prices track alongside. As a result, power producers are footing the bill which often results in reduced electricity generation and blackouts for consumers.
In India, the story appears to be quite similar. Politically charged power tariff rates are quite difficult to revise and producers end up footing the bill for rising thermal prices. But other reforms are also needed, according to industry experts.
Ratings agency Fitch Ratings recently released a note suggesting that the launch of new generation projects in India “will slow down in 2012 because of lower investor interest over fuel availability, softening of merchant power prices, higher fuel costs, higher interest rates and slow progress on reforms at distribution level.”
Director General of the Confederation of Indian Industry (CII), Chandrajit Banerjee, also feels India’s power sector is long over due for reform. “Critical obstacles including fuel supply bottlenecks, distribution losses and lack of funding need to be urgently addressed to achieve double digit GDP growth,” he said earlier this week.
As domestic coal production in India has not remained in line with growing consumption, Indian power suppliers are also relying increasingly on costly imported coal.
“With coal–based capacity addition expected to account for over 50 percent of total capacity additions in the upcoming 12th plan, the issue of acute shortage of domestic coal in the country and its impact on project economics due to higher prices of imported coal needs to be urgently addressed” said Anil Sardana, Chairman, CII National Committee on Power.
“In addition,” Sardana continued, “there would also be financial stress on assets already built or committed by many private sector players.”
CII is suggesting the Indian coal sector requires drastic need of reform, specifically opening up state-owned Coal India’s monopoly on exploration and production.
Price relief to come
Coal prices are, however, expected to relent this year as slowing demand from these very same emerging market consumers will release some pressure on demand. Thermal coal from Australia’s Newcastle port, a benchmark price for Asia, rose 1.7 percent to end last week at $116.19/ton.
Platts Coal reported late last year that Societe Generale’s energy research group had revised downward its respective average next-year price estimates in 2012 for FOB South African (Richards Bay) and Australian (Newcastle) coal to $106.50/mt, down $23.30, and $109.80/mt, down $27.
But despite the relief in prices, coal demand from emerging markets is unlikely to relent in its dramatic ascent any time soon.