Coal: long-term decline overshadows short-term strength


Coal has been on a tear of late as Chinese imports have surged to meet increased domestic demand.

Australian New Castle coal futures have jumped from lows of around US$47 per tonne last year to around US$98 per tonne today.

However, the long-term future for coal prices must surely be less bright as the world increasingly turns to cleaner alternatives.

Rollercoaster ride

Coal has been on a rollercoaster ride over the past year. Prices shot up in the aftermath of Donald Trump´s victory in November´s US presidential election as investors raised their expectations for global growth.

The new administration´s agenda to boost growth through lower taxes and increased spending was viewed as being bullish for industrial commodities such as coal.

Global steel production is still very much dependent on coal; around 60% of steel output uses so-called coking coal. Coal, as with iron ore, another key ingredient in steel production, tends to move in tandem with economic cycles.

Coal quickly came off its highs, especially as questions were raised over the legislative path of many of Trump´s policies. Newcastle coal futures traded as high as US$114 per tonne around the time of the US election, but had fallen back to around US$74 per tonne by early May.

In recent weeks, however, coal prices have picked up sharply again, reaching around US$98 per tonne.

Chinese imports

China is both the world´s biggest producer and consumer of coal, with continued heavy reliance on the fossil fuel to meet its electricity generating needs.

Over the past few months, Chinese imports have surged as the nation has struggled to cope with higher demand. China´s imports rose by around 18% during the first seven months of 2017 versus the year-ago period.

Higher demand from Chinese power stations is a key reason behind the increase given that thermal power generation in the country has leapt by 8% over the same period.

Coupled with this, China´s own coal-producing capacity has been crimped by state measures implemented last year to close down inefficient and illegal mines.

Higher steel production

Robust steel production is undoubtedly a factor in coal´s recent ascent. In July, global steel output reached its second highest monthly level of all time, at 143 million tonnes. Much of the growth came from China, where steel output climbed 10% year-on-year over the month.

However, this is expected to be a transient phenomenon.

Analysts at ING point out that Chinese steel exports are on a downward path and predict steel prices to come under pressure.

“The expected price pressure should lead to steel mills’ utilisation rates falling, reducing

coking coal demand moving forward,” said ING´s commodities team in a report this week.

Steel is currently trading at around $US312 per tonne having itself risen substantially from a record low of $US90 in March last year.

Cleaner energy

Over the past few years, China has been working hard to clean up its vast energy industry. With pollution having become a huge problem across the country, as smog levels endanger the health of its people, reducing emissions is currently among the top priorities for the government.

It means the longer-term trend for Chinese coal demand is likely to be a downward one over the next decade.

Official figures show that despite the nation´s total energy consumption increasing by 1.4% in 2016, coal use fell by 4.7%.

At the same time, cleaner energy consumption, including the likes of wind power, hydropower, nuclear power and natural gas accounted for 19.7% of energy use last year, a 1.7% increase on the prior period.

The country has actually become the world´s biggest investor in renewables and been steadily extending the policy it first announced in 2013 to ban the construction of new coal-fired power stations in various regions.

Global trend

The declining use of coal in electricity production is a familiar trend around the world. Burning coal for electric power and other industrial uses is one of the biggest causes of greenhouse gas emissions and climate change.

As the technology surrounding cleaner energy alternatives keeps improving, the move away from coal appears to be speeding up.

Certain developed countries that have previously been relatively heavy users of coal for their electricity generation are on course to phase out coal-fired power stations altogether.

For instance, rapid shutdown of such power plants means that Australia should have rid itself of this method of electricity production by as early as 2040. Shutdowns and the rapid growth of cleaner alternatives saw the UK´s consumption of coal drop by an astonishing 50% in 2016.

There is no doubt that long-term global demand for coal is on a downward path. The same should be expected for prices.

Source: Capital

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