The changing thermal coal market
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The thermal coal market will have a ‘bumpy ride’ in the short-term and will also have to face strategic challenges in the medium term; however, given the long-term outlook for demand and growth globally, thermal coal will remain a strong part of the global energy mix.
“The thermal coal market has experienced soft coal prices since April this year, with no indication of the situation improving before the end of the year. Short-term structural weaknesses as well as a combination of weaker-than-expected demand from India and China, clement weather conditions and excess global supply has put pressure on thermal coal prices, resulting in the benchmark price of thermal coal being pulled down by more than 20% since the start of the year,” explains Lok.
He adds that demand into Europe has become stagnant at best due to the Sovereign Debt crisis, as well as energy substitutions from gas and renewable energy. What’s more, the short-term reduced offtake of coal to Chinese markets is largely due to a surplus of hydropower as a result of an unusually high rainfall season and low price coal dumping from traders in Indonesia. Exacerbating the situation is the supply of surplus coal onto the export market from the United States of America (USA), which is due to the fact that natural gas prices in the USA are significantly lower than past years due to an expanded natural gas business.
The future for thermal coal?
Lok believes that as global growth remains positive, so will see the continued support for thermal coal takeoff. China and other power-hungry emerging economies, such as India, will remain significant importers for thermal coal in the medium- to long-term.
“China currently, and will into the future, remains the key driver of secular demand, despite its managed moderation of growth. On the Chinese domestic front, as a simple example, housing requirements will see more than 10 million housing units a year over the next two decades being built to meet urban housing demand. Thermal coal in this case will remain an important input into the energy mix that will fuel the growth,” explains Lok.
Other economies, such as India and Japan, are also global growth generators. Projections are that India will outpace China to become the world’s largest economy by 2050, boasting a Grosse Domestic Product (GDP) of $86-trillion – this according to a report published by global property firm, Knight Frank & Citi Private Bank. What’s more, India is also set to overtake Japan as the second largest consumer of thermal coal by 2030, growing from approximately 80-million tonnes per year to 400-million tonnes per year.
Lok forecasts that in the medium-term, continued commodity demand globally will remain strong. In the case of India, in particular, there is, and will continue to be a strong demand for low grade thermal coal to fuel power stations.
Thermal coal and alternatives
Alternatives to thermal coal power generation, such as renewable energy and gas extraction, will have an impact on future thermal coal demand and pricing. Renewable alternatives, such as hydropower, solar power and wind power, will grow exponentially owing to its positive environmental impacts, but is unlikely to impact the thermal coal market significantly in the medium-term.
Lok points out that the use of shale or natural gas is however a different matter. Thermal coal and natural gas, such as shale gas, are now competing for the same market. “Due to the ease of extraction and relative low cost as an energy source, natural gas in future will become a more significant contributor to the demand and pricing for thermal coal.”
Resource nationalisation
Another important factor that will impact the pricing and supply of thermal coal will be resource nationalisation by governments globally.
“This can range from direct nationalisation to more indirect methods, such as increased taxes on resource companies. Governments that view commodities as strategic resources could impact the market by placing limits on export volumes, which will in turn result in reduced supply to the global market. The exact impact of resource nationalisation is however too difficult to predict at this stage, but will have to be monitored specifically for its impacts on the medium-term thermal coal market,” explains Lok.
Replacing thermal coal production capacity on a continued basis also seems to be a challenge and could possibly be one of the more significant factors impacting on thermal coal pricing and supply in the medium- to long-term. Meeting the substantial global demand growth will require the expansion of existing supply basins and the development of new reserves in more remote regions, such as Venezuela, Ukraine and Mongolia. China and India, however, will continue to drive the thermal coal rebound with rapidly growing economies which are heavily reliant on coal; while longer term fundamentals suggest the high demand growth trend will continue, concludes Lok.
As the Director of the Coal business unit in Hatch, Gerrit Lok is leading a number of thermal coal related studies and projects in Africa and abroad for some of the world’s largest coal producers.
Hatch has been at the centre of the coal business for years, with global teams working together to provide integrated ‘pit to port’ services, beginning with early business analysis, due diligence and engineering studies to full Engineering Procurement and Construction Management (EPCM) services, and ongoing operations and maintenance support. Hatch’s diverse experience covers a range of coal and power projects, integrated-gasification-combined-cycle (IGCC) power generation, CO2 capture, coal to liquids (CTL) and coal-bed methane projects.
Ends.
Notes to the Editor
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About Hatch
Hatch supplies process and business consulting, information technology, engineering, and project and construction management to the mining, metallurgical, energy and infrastructure industries.
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