{"id":6322,"date":"2017-09-06T16:40:15","date_gmt":"2017-09-06T08:40:15","guid":{"rendered":"http:\/\/chinggislaw.com\/?p=6322"},"modified":"2021-09-14T18:50:42","modified_gmt":"2021-09-14T10:50:42","slug":"the-outlook-for-coal","status":"publish","type":"post","link":"https:\/\/chinggislaw.com\/?p=6322&lang=en","title":{"rendered":"The Outlook for Coal"},"content":{"rendered":"

As noted by the International Energy Agency (IEA) coal supplies a third of all energy used worldwide and makes up 40% of electricity generation, as well as playing a crucial role in industries such as iron and steel.\u00a0 Coal is also very important for Mongolia, as it is one of Mongolia\u2019s major exports.<\/p>\n

The IEA notes that despite legitimate concerns about air pollution and greenhouse gas emissions, coal use will continue to be significant in the future. The IEA argues that greater efforts are needed by government and industry to embrace less polluting and more efficient technologies to ensure that coal becomes a much cleaner source of energy in the decades to come (International Energy Agency 2016a: 1).<\/p>\n

Despite suggestions that demand will not rise in the period ahead (see below), in the short term demand for coal seems quite strong.\u00a0 The IEA\u2019s projections to 2020 are shown in Figure 1.<\/p>\n

Short term demand for coal remains strong<\/strong><\/p>\n

Figure 1:\u00a0 World coal demand to 2020<\/p>\n

\"\" \"\" \"\" \"\" \"\" \"\" \"\"
\nLonger term demand scenarios are weak in terms of growth
\n<\/strong>
\nIn 2016 the International Energy Agency suggested that coal consumption will barely grow in the next 25 years, as demand in China starts to fall back thanks to efforts to fight air pollution and diversify the fuel mix (International Energy Agency, 2016b: 1).<\/p>\n

But world coal production is declining<\/strong><\/p>\n

On the other hand, world coal production declined in 2014 for the first time this century. This decrease continued through 2015 and accelerated in 2016 to 458 Mt, or 6.3% lower, as combined production of all coal types fell to its lowest level since 2010.<\/p>\n

This reduced level, however, was still 2.63 Gt (56.7%) higher than production in 2000.<\/p>\n

Figure 2:\u00a0 World Coal Production, (Mt)
\nSource: International Energy Agency, 2017 Coal Information Overview p. 4<\/p>\n

The dragon\u2019s mood is a key issue<\/strong><\/p>\n

China is a big producer of coal and a big user of coal.\u00a0 China uses thermal coal for power generation and coking coal for steel production.\u00a0 Therefore, to the extent that China reduces or increases coal production, this influence coal (and iron prices).\u00a0 A rise or fall in China\u2019s demand for coal will also influence coal prices.<\/p>\n

China\u2019s is the world\u2019 biggest user of thermal coal for electricity production
\n<\/strong>
\nAbout 40% of the world\u2019s thermal coal goes to electricity generation.\u00a0 China\u2019s immense influence in the thermal coal market is reflected in Figure 3 below, which tracks use of coal for electricity production from the early 1990s, since when China\u2019s use of thermal coal for electricity production has increased markedly.\u00a0 Indeed, China\u2019s increasing demand for electricity, closely associated with China\u2019s rapid growth in Gross Domestic Product over this period, was the major factor influencing world demand for thermal coal, as demand for thermal coal was subdued in other markets and declined in the United States from around 2000.<\/p>\n

Figure 3:\u00a0 Coal-fired Electricity Generation \u2013 Annual<\/p>\n

Source:\u00a0 Saunders. T., 2015. Developments in Thermal Coal Markets: 21<\/p>\n

China remains the world\u2019s largest coal producer but China\u2019s production has fallen in recent years in response to air pollution concerns.<\/p>\n

Table 1:\u00a0 World coal supplies by country (mt)<\/p>\n

Source: International Energy Agency, 2017 Coal overview p. 4<\/p>\n

The importance of China for world coal consumption is emphasized by Figure 4.
\nChina now dominates world coal consumption and its importance as a market has grown markedly since the early 1990s when China began to open its markets and developed export oriented heavy industries, where electricity supplies were a key input.<\/p>\n

Figure 4:\u00a0 World demand for coal<\/p>\n

Source: International Energy Agency 2017: 7
\nDespite the decrease in coal consumption by China in recent years, China\u2019s imports have risen to offset decreases in domestic production.\u00a0 There have also been supply interruptions in Ukraine from the conflict there, in Australia because of weather issues, while coal exports from North Korea have fallen because of UN sanctions on North Korea\u2019s exports.
\nThis has led to increased demand for coal from Mongolia.\u00a0 Mongolia\u2019s coal production increased markedly in 2016.\u00a0 Indeed, in the short term, if these conditions persist, Mongolia\u2019s coal sector has good prospects.<\/p>\n

In the longer term, China is still a key influence.\u00a0 China is clearly aiming to change its energy mix away from coal to reduce air pollution.\u00a0 However, forecasts suggest thermal coal will still in heavy use for some time to come as shown in Table 2 below.<\/p>\n

While China clearly has the policy intent to diversify to hydropower, gas and nuclear power, at least to 2030 thermal coal seems likely to remain in strong demand.<\/p>\n

Table 2: China: forecast power generation by source to 2030<\/p>\n

Source:\u00a0 Yuan et al. 2015 p.7<\/p>\n

What does it mean for coking coal?<\/strong><\/p>\n

While the short term outlook for Mongolia\u2019s coking coal exports looks good in price and quantity terms because of supply restrictions from other sources (initially including China, since eased somewhat), the longer term outlook is more unsettled.\u00a0 China is the key market for Mongolia\u2019s coking coal, as is the case for thermal coal.<\/p>\n

But even the short term market is volatile.\u00a0 In February 2017 the National Australia Bank noted that slowing Chinese construction activity in 2017 was expected to weaken steel demand, reducing, demand for iron ore and coking\u00a0 coal.\u00a0 In March, Reuters correspondent Clyde Russell also noted China\u2019s approach to economic growth will be crucial for steel demand, with the market watching to see if Beijing would continue measures to stimulate infrastructure spending and construction, while at the same time shutting down excess steel capacity.<\/p>\n

By April, Wood Mackenzie noted global coal markets were facing \u2018extraordinary challenges and uncertainties.\u2019 Wood Mackenzie forecast the benchmark metallurgical coal prices price to drop to US$128\/t for the Q4 2016.\u00a0\u00a0 Morgan Stanley also expressed concern about\u00a0 commodity markets being gripped by coking coal fever and noted \u201cWe\u2019re actually still flat-to-bearish on the metallurgical coal price outlook.\u201d\u00a0 KPMG\u2019s August 2017 compilation of consensus hard coking coal forecasts arising from industry experts also suggests the price bonanza is running out of steam.<\/p>\n

Figure 5:\u00a0 KPMG coking coal price forecasts, 2017<\/p>\n

In summary, while supply restrictions have been good for Mongolia\u2019s coking coal exports in the short term, the situation is volatile!\u00a0 Enjoy it while you can!\u00a0 In June 2017 the Australian Government\u2019s forecast China\u2019s metallurgical coal imports will decline by 11% in 2018 and by a further 12% in 2019. The outlook for metallurgical coal imports in China is expected to be impacted by moderating growth in domestic steel demand, as Beijing\u2019s fiscal stimulus fades and activity cools in the construction sector.<\/p>\n

The long term coking coal outlook for Mongolia is also China centric.\u00a0 Will China maintain its investment in infrastructure in the long term?\u00a0 Will China continue to diversify its economy away from heavy industry towards services (which may reduce demand for steel and coking coal)?\u00a0 And a bigger question, what will be the effect of China\u2019s \u2018belt and road\u2019 initiative on demand for steel and coking coal? These are all good questions, for which good answers are few right now.\u00a0 We will just have to wait and see! n<\/p>\n

By Paul Mills, Senior Economic Adviser, Chinggis Law LLC<\/p>\n","protected":false},"excerpt":{"rendered":"

As noted by the International Energy Agency (IEA) coal supplies a third of all energy used worldwide and makes up 40% of electricity generation, as well as playing a crucial role in industries such as iron and steel.\u00a0 Coal is also very important for Mongolia, as it is one of Mongolia\u2019s major exports. The IEA […]<\/p>\n","protected":false},"author":2,"featured_media":6700,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[59],"tags":[],"_links":{"self":[{"href":"https:\/\/chinggislaw.com\/index.php?rest_route=\/wp\/v2\/posts\/6322"}],"collection":[{"href":"https:\/\/chinggislaw.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/chinggislaw.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/chinggislaw.com\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/chinggislaw.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=6322"}],"version-history":[{"count":3,"href":"https:\/\/chinggislaw.com\/index.php?rest_route=\/wp\/v2\/posts\/6322\/revisions"}],"predecessor-version":[{"id":6976,"href":"https:\/\/chinggislaw.com\/index.php?rest_route=\/wp\/v2\/posts\/6322\/revisions\/6976"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/chinggislaw.com\/index.php?rest_route=\/wp\/v2\/media\/6700"}],"wp:attachment":[{"href":"https:\/\/chinggislaw.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=6322"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/chinggislaw.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=6322"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/chinggislaw.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=6322"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}