The RBA released an interesting report on the global coal market yesterday, which is well worth reading for anyone interested in the black stuff (or commodities generally). Below are the key extracts and charts.
Thermal coal prices increased markedly over the decade to 2011, driven by a substantial increase in global demand. That led to significant investments in thermal coal mine and port capacity, particularly in Australia and Indonesia. The resulting increases in the seaborne supply of thermal coal have underpinned a significant fall in global thermal coal prices. However, an easing of the pace of growth of global demand for thermal coal, reflecting a move towards cleaner energy sources and a slowing in the growth of aggregate electricity demand, has also weighed on prices…
Japan is the largest destination for Australian thermal coal exports (which tend to be of a higher quality than Indonesian exports), while China is the largest destination for Indonesian coal exports…
Coal is used to generate around 40 per cent of the world’s electricity, and this share has remained relatively stable over the past 15 years…
China’s rapid economic development over the 2000s drove a sharp increase in global demand for thermal coal. China surpassed the United States as the largest generator of coal-fired electricity in 2006 and accounted for 41 per cent of global coal-fired electricity generation in 2011 (up from 18 per cent in 2000. Demand for thermal coal in the rest of Asia also increased noticeably over the 1990s and 2000s….
The sharp rise in Chinese demand for thermal coal saw global trade in coal increase significantly from the mid 2000s… There was also a sharp increase in Indian imports of thermal coal from the mid 2000s…
The supply of thermal coal from the two largest exporters, Australia and Indonesia, increased markedly in response to these higher prices…
Demand for thermal coal across a number of major electricity producing regions has been relatively weak since 2011. This weakness partly reflects a slowing of growth of aggregate electricity generation, particularly in China, and is consistent with a moderation in the growth of activity in China’s energy-intensive manufacturing sectors. There also appears to have been a substitution away from coal and towards cleaner energy sources.
In China, the shift in demand towards cleaner energy sources has been motivated by a number of policy measures to combat air pollution…
Coal-fired electricity generation in the United States has also been relatively weak in recent years, owing largely to the increased cost competitiveness of gas-fired electricity generation…
Significant investment in new mines and capacity expansions has resulted in growth of thermal coal supply outpacing demand over the past few years. The completion of these investment projects has also seen producers increasingly focus on productivity improvements. These factors have contributed to significant declines in thermal coal prices since 2011. A sharp fall in oil prices since mid 2014 is also likely to have put downward pressure on thermal coal prices, insofar as it has reduced coal extraction and transport costs and enabled supply to be maintained…
The significant increases in supply from lower-cost producers have resulted in the thermal coal cost curves shifting outward in recent years. The cost curves have also flattened, due to both the expansions to low-cost supply and a fall in production costs at existing mines.
The increases in seaborne supply have been driven by Australia and Indonesia…
Chinese authorities have announced several policies aimed at supporting the domestic coal industry, including a directive for power utilities to reduce their usage of imported thermal coal and introducing tariffs on thermal coal imports. The implementation of these policies, together with weaker Chinese demand for thermal coal, has resulted in a marked decline in Chinese thermal coal imports since early 2014. There has been a significant decline in Chinese imports from Indonesia and some smaller exporters, while imports from Australia have declined more modestly…
At current prices, a significant share of [Australian] seaborne thermal coal supply is unlikely to recoup its costs of production…
The Outlook:
The relatively low cost of coal-fired power generation, and its stability as a source of base-load power generation, is expected to support thermal coal demand over the medium term, particularly in China and India. However, the outlook for Chinese demand will largely depend on broader economic activity in China, particularly in the energy-intensive manufacturing sectors.
The pace of expansion in the global seaborne supply of thermal coal is expected to slow over the next few years, as existing investment projects reach completion and there are few plans to commit to new projects. Indeed, the falls in thermal coal prices over the past few years may elicit a reduction in existing supply from higher-cost producers.
In Australia, the extent of any additional mine closures and the level of exports will depend on the ability of Australian producers to continue to reduce costs relative to international competitors. Nevertheless, the rate of cost reductions is likely to slow as the easiest measures are exhausted…
Overall, thermal coal prices are expected to remain at relatively low levels over the next couple of years, owing to the high level of thermal coal supply and a continued shift towards cleaner energy sources in some countries.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
