- Despite rising climate concerns, what still makes thermal coal the primary source of energy?
- Is the current slowdown the beginning of the end of global thermal coal industry?
The global thermal coal industry was a bit late in joining the Covid 19 led downturn as it remained resilient in the first 3-4 months of 2020 while most other industries had started to feel the heat. The benchmark Australian thermal coal spot price remained largely stable in the range of US$ 67-69 per tonne (the range it maintained during the H2 2019) in Q1 2020 before spiralling down to US$ 56 per tonne by June 2020.
This resilience in early 2020 was led by a combination of increase in demand/imports by China (largest importer) and decline in supply/exports from South Africa (fourth largest exporter). The outbreak of coronavirus in China at the start of 2020 halted its domestic coal production and power producers resorted to imports to meet their demand. On supply side, lockdown in South Africa deferred shipment, creating a temporary supply shortage in the market.
Nonetheless, the industry began to feel the heat by April 2020 when coronavirus had spread in the entire world resulting in global lockdown. When all other countries halted their industrial activities starting April 2020, China had begun the unlock process. As the economy opened up in China and its industrial activities began production, its import demand for coal fell significantly. This together with lockdown in all other countries lead to a sudden and sharp fall in global coal demand. This in turn, resulted in a steep fall in benchmark spot price which reached as low as US$ 50 per tonne in April and has been hovering in the range of US$ 52-56 per tonne since then. The top exporting countries, Indonesia and Australia felt the pain as exports declined to record levels and reduced prices made it difficult for low cost producers to continue production.
The concerns around the thermal coal industry, however, are beyond this Covid led slowdown. Driven by the rising concerns about climate change, the western world is already seen shifting towards renewable sources. The share of North America and Europe in total thermal coal consumption has fallen from 15% and 10% respectively in 2010 to 8% and 7% respectively in 2019. This declining trend was accelerated in 2020 as the Covid led lockdown resulted in significant decline in power consumption coupled with abundant availability of cheap natural gas (particularly in the United States) leading to sharp fall in coal demand. EIA expects US coal consumption to reduce by 20% (y-o-y) in 2020. US has been the frontrunner in driving this shift. As per the Institute for Energy Economics and Financial Analysis (IEEFA), solar, wind and hydropower are the three main sources of energy in the country and they produced more power than coal during Q1 2020. Hence, IEEFA now expects that renewables will generate more electricity than coal for the entire first six months of 2020.
While this transition has expedited in the western world, Asia continues to consume coal as the primary source of energy. Though Asian countries are also committed to consume cleaner fuel, the shift is rather slow in these countries and coal being the cheaper fuel continues to dominate the power generation market. Hence, the declining trend witnessed in west is to some extent offset by Asian countries. The share of APAC in the total steam coal consumption has increased from 68% to 77% from 2010 to 2019 with China and India driving this growth. While China’s share increased from 48% to 52%, India’s contribution surged from 8% to 12% during the same period.
Both China and India are expected to drive demand growth starting 2021 as their economies rebound and power demand recovers. China currently has around 1,000 gigawatts (GW) of operational coal fired power generation capacity and has a substantial pipeline of coal-fired power stations. Similarly, India has plans to open up coal mining to private sector in order to boost the industry and is also expected to increase imports over the next two years. Nonetheless, these countries are also transitioning from importing coal to promoting domestic coal producers. Hence, from global industry standpoint, China and India will continue to drive the growth, however, their gradual shift towards prioritizing domestic producers might affect exporting countries in the long term.
In a nutshell, the current slowdown led by Covid outbreak, has shaken the thermal coal industry globally as the demand fell sharply, yet the industry is expected to rebound over the next couple of years as the economy recovers leading to increase in power demand. In 2020, thermal coal demand is forecasted to decline by 8% and production is estimated to grow by 0.5%. Over the longer term, while the industry is expected to shrink in industrialized countries, particularly, in America and Europe, Asian countries like China and India will continue to drive the growth in the industry in foreseeable future, however, might shift to domestic production and reduce imports over the long term.