IEEFA Review: Global Coal Outlook Remains Dim

CLEVELAND, Dec. 17, 2015 (IEEFA) – The medium-term outlook for the global coal industry remains one of declining demand, excess supply, under-utilized coal-related rail and port infrastructure, relentless cost-cutting initiatives, excessive financial leverage, asset write-downs and unprecedented stranded assets and shareholder wealth destruction, according to an industry review this week by the Institute for Energy Economics and Financial Analysis (IEEFA).

The IEEFA review aims to provide context for the Dec. 18 release of the International Energy Agency’s (IEA) “Coal Medium Term Market Report 2015,” which overstates the future of the coal industry.

IEEFA analysts see the Paris emissions-control agreement as a step toward accelerating the inevitable transformation of global energy markets. Global policy momentum will combine with an accelerated shift in investment away from fossil fuels toward renewables, storage and energy efficiency, IEEFA analysts say.

“The global traded coal industry is in dire straits,” said Tim Buckley, IEEFA’s director of energy finance studies, Australasia. “Indian coal imports have halved in the month of November 2015, exactly as forecast by Indian Energy Minister Piyush Goyal in November 2014. Coal imports into China are down 30 percent year on year in 2015. The collapse in the two largest coal import markets over 2015 clearly explains why coal company share prices and the traded price of coal have both continued to decline and the forward market suggests this trend will continue through at least 2021.”

Building on IEEFA’s November 2015 report “Past Peak Coal in China,” we see tend key points today that illustrate the extent of the structural shift away from coal.

1. China’s coal consumption peaked in 2013. China accounted 50 percent of global coal consumption in 2014, so the 2.6 percent decline in 2014 China coal production reported by the BP Statistical Review combines with an 11 percent decline in coal imports to amount to a record decline in China coal consumption in 2014. China’s coal production is down 3.7 percent in 2015. Following the further decoupling of electricity demand from economic growth and the rapid deployment of non-coal power generation across China, the rate of decline in coal consumption has doubled in 2015. This is a point the IEA might clearly acknowledge for the first time.
2. China’s coal imports are down 30 percent in 2015. Following on from an 11 percent decline in coal imports in 2014, the year to November 2015 has seen a decline in coal imports of almost 30 percent .
3. Indian coal imports are down 12 percent in 2015. India’s November 2015 coal imports sank to 11.6Mt, down 49 percent from the year before, while for April-November it was down 12 percent to 112Mt. Forecasts by the IEA for continued strong growth in Indian thermal coal imports over the next decade run counter to the stated policy intent of the Indian government and the hard evidence being reported.
4. Indian solar is already below import coal parity. Following SunEdison winning a US$500m, 500-megawatt (MW) Andhra Pradesh solar auction in November 2015 at a record low Rs4.63/kWh (US¢7.12/kWh) tariff, the IEA maintained its view that India’s solar transformation would only deliver 100 gigawatts (GW) of solar by 2030, nine years after the Government of India’s 2021-22 target. In December 2015, the SoftBank/Foxconn/Bharti Enterprises consortium had a US$350m auction win of another 350MW of solar in Andhra Pradesh at the same record low Rs4.63/kWh (US¢7.12/kWh) tariff. The under-bidders on both auctions were disclosed as being within 0.2 percent of the price, showing both auctions are representative that solar is immediately lower cost that imported-coal fired power generation, and with a real price decline of some 5 percent annually over the 25-year contract term. This deflationary impact will have a very positive impact for India. For more detail, please refer tothe IEEFA report “Indian Electricity Sector Transformation: Global Capacity Building.”
5. U.S. consumption of coal is down 10 percent in 2015. U.S. coal rail shipments in fourth quarter to date are down 31 percent, almost double the 17 percent decline evident over 2015, showing the acceleration in rate of decline as the year has progressed. With U.S. natural gas prices at a record low, there is no sign of any easing of the coal-to-gas electricity generation shift. Likewise, the House of Representatives has proposed a five-year extension of the 30 percent Investment Tax Credit (ITC), which could drive a doubling of U.S. solar installations over 2017-2021 to well over 10 gigawatts annually.
6. The Paris agreement delivers a global impetus toward keeping global warming to 1.5-2 degrees Celsius. The IEA has not factored this new reality into its forecast modeling.
7. Australian coal production continues to decline. While the Australian coal industry continues to forecast increases in coal production, even the IEA’s 450 Scenario has Australian coal production dropping 30 percent over 2013-2040, directionally consistent with the IEA-modeled 38 percent decline in coal consumption globally.
8. Stranded assets continue to cause shareholder wealth destruction. Peabody Energy is down 37% this past month, Consol Energy is down 13 percent, Whitehaven Coal is down 30 percent, China Shenhua is down 7 percent, Adaro Energy (Indonesia) is down 13 percent and Stanmore Coal is down 32%, all illustrative of a global trend of underperformance as investors act on increasing stranded-asset risks.
9. Coal-industry proposals to develop “clean coal” technology lack substance and will probably fail: While the IEA continues to promote High Energy Low Emissions (HELE) and Carbon Capture and Storage (CCS) technology as the future of the coal industry, the success of such initiatives is doubtful. This slightly less dirty coal power has a significantly higher capital cost, it will still incur significant carbon price imposts and is still almost 100 percent more polluting than renewable energy or energy efficiency. Once built, any new coal fired power plant will have a much higher marginal cost of production than existing renewable plants, which means the five-year trend toward falling coal plant utilization rates across China and India will continue. The price of new coal-fired power generation continues to rise while the cost of renewable energy continues to fall. As to CCS in particular, the coal industry has done little to dispel reports on the C$1.4 billion debacle in Saskatchewan, while cost blowouts at the US$6.49 billion Kemper proposal are regular news.
10. IEA research is shaped in part by its Coal Industry Advisory Board. This advisory board represents the coal industry itself, and includes influential representation from the pro-coal Minerals Council of Australia. The absence of Indian or Chinese coal company input is evident in the IEA’s work, as are the risks of group think.

Media contact: Karl Cates, [email protected], 917.439.8225

About IEEFA

The Institute for Energy Economics and Financial Analysis (IEEFA) conducts research and analyses on financial and economic issues related to energy and the environment. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy and to reduce.