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2016 saw a rather unexpected turnaround of coal prices on a global scale. After declining steadily since 2011, amidst China’s economy slowdown and Western World-led decarbonisation efforts, coal prices suddenly made a 180-degree shift, rebounding by 100% over the year. Price of Australian benchmark coal reached US$100/tonne, while the Colombian coal price settled at US$86.7/tonne in November 2016, more than doubling from US$49.8 and US$43.0/tonne respectively in January. While the surge might seem impressive, we do not believe it is indicative of positive prospects for coal demand.
This article is a part of a series on global decarbonization efforts and their effects on energy industries, analyzed in the strategy briefing Energy Industries in the Middle of the Green Power Boom.
China is by far the largest coal mining nation and consumer in the world. In 2015, Chinese mines produced 3,747 million tonnes, or 47.7% of global coal output. Recent years have marked a decline in coal demand in China, following deceleration in the country’s manufacturing output growth, seen as a fundamental shift to a more advanced, service-based economy. Lower Chinese demand and subsequent market oversupply, exacerbated by increasing global decarbonisation efforts, resonated loudly in the global market, with coal prices moving steadily down since 2011, bottoming in the beginning of 2016. In addition, widespread burning of coal has caused pollution crisis in major Chinese cities.
Overproduction and environmental concerns have forced China to reconsider its energy policies with its excessive and largely inefficient coal mining sector appearing at the top of the victim list. In the end of 2015 China announced halting the new coal mine licence issuing for the next three years. Later, the government was obliged to shut down 4,300 coal mines (from approximately 11,000 at the end of 2015), cutting the outdated capacity by 700 million tonnes and relocating 1 million employees over 2016-2019. Coal production was also capped by working day limits and the introduction of free weekends for coal mine personnel. Restrictive measures hit China’s coal output hard: by mid-2016 it had decreased by nearly 10%, compared to the same period in 2015. Lower domestic production spurred a rise in volume of imported coal, which jumped by 25.2% over the year. Naturally, the global coal market reacted instantly, with expectations surging and prices rising steeply throughout 2016.
As important as China is in the global coal mining context, a set of external events also added to the effect on coal prices in 2016. Frequent industrial action from Indian coal miners, aimed at securing higher wages, for the last two years have led the local mining industry to stagnation and uncertainty, with the production of state-controlled Coal India Ltd failing to achieve government targets. Indonesia, the largest coal exporter globally, was hit heavier than expected by rainfall in the latter half of 2016, effectively disrupting coal supplies. One of the Indonesian coal mining industry leaders, ITM, reported 9% decline in volume output compared to 2015, mainly due to production losses during an unusually wet third quarter. More than 50% of crude oil price rebound from the bottom lows in the beginning of 2016 also influenced recovery of coal.
Source: World Bank, 2017
While an impressive surge in coal prices might seem promising for the industry, there are few reasons to believe that the recovery can be sustained. Fundamental reasons why coal is gradually being substituted by alternative fuels remain unchanged. Natural gas is still cheap and, while prices are expected to increase over the next years, will remain priced much below the levels of 2014. Technological progress of renewable energy is bringing down energy production costs faster than ever. In 2016, the off-shore wind energy price in Denmark decreased by 50%. Globally, despite investments staying flat, 33% more electricity was produced from renewable energy sources, mainly due to improved wind and solar technologies. Environmental commitments of the largest economies look firm as well. And not only in the West: India has announced its intention to achieve 57% of its total electricity capacity through non-fossil fuel sources by 2027 – an astonishing share for the economy, and this from a country that is expected to be one of the last strongholds for coal demand. As Euromonitor International believes that structural changes in the global energy mix are set to continue, we think the temporary coal price recovery is not a sign of, and will not alter, a medium to long term decline in global coal demand. We also expect the coal price to calm in 2017, due to stabilisation of global coal supply flow.