The latest energy-market numbers from the Chinese government show an acceleration of a remarkable phenomenon that began to emerge in 2012-2014. The bottom line today is that the traditional nexus between real GDP growth, electricity expansion and coal demand is now broken.
Demand for coal in China grew by 10 percent annually over the decade to 2011, but that halved to between 4 percent and 6 percent annually in 2012 and 2013. In 2014, according to the most recent government figures, demand actually declined by 2.1 percent.
This is no small thing for global coal markets, and the implications are enormous.
The latest data is consistent, however, with IEEFA’s prediction last fall that China’s demand for coal will permanently peak by 2016 —if not earlier—and will gradually decline thereafter.
Digging a littler further into the most recent trove of economic data from Beijing helps explain what’s happening.
China’s overall GDP growth in 2014 is expected to come in about the same 7.3 percent growth reported for the first nine months of the year. But China’s electricity demand, as seen in the newest numbers, grew by only 3.9 percent year-over-year through November. What these two figures demonstrate in tandem is that the combined impact of energy-efficiency initiatives and structural economic changes toward less electricity-intensive industry sectors has reduced the ratio of electricity-demand growth to GDP from above 1.0x over the past 13 years to 0.53x in 2014.
This is an emerging shift that has not gone entirely unnoticed by Wall Street analysts. This past August, for instance, Morgan Stanley halved its outlook for China’s electricity-demand-to-GDP ratio from 2014 to 2016, forecasting that it will register at somewhere between 0.3 and 0.5x over the medium term, signaling a fundamental shift in the Chinese energy economy. IEEFA has forecast a ratio of 0.6x 2014-2020, by the way, an estimate that may—if anything—prove conservative.
Of equal importance is that China’s domestic coal production declined by 2.1 percent in the year to November compared to 2013, while coal imports were down by 9 percent, meaning that coal consumption dropped roughly 2.3 percent. This contrasts with an electricity-production growth rate of 3.9 percent year over year, reflecting a rapid loss of market share for coal in 2014 against all other sources of electricity generation across China – wind, solar, hydro, nuclear, biomass and natural gas.
The rise of renewables in China is significant. IEEFA forecasts that in 2014 alone China will install 22 gigawatts of hydropower electricity capacity, 18 gigawatts of wind-powered capacity, 13 gigawatts of solar, 5 to 7 gigawatts of nuclear, and 4 to 6 gigawatts of gas-fired capacity. Combined with 22 gigawatts of net new coal-fired capacity, IEEFA sees China’s total electricity capacity installs totaling 90 gigawatts in 2014 (a more than 6 percent year-over-year increase in total capacity growth).
The result is that coal-fired average utilization rates have declined from an estimated 60 percent in 2011 to about 56 percent in 2014. Given this excess capacity, new installations of coal power are expected to slow rapidly, and China could well see net annual coal-fired power capacity reductions from 2016 onwards.
IEEFA has coal’s share of electricity production in China dropping from the 78 to 79 percent average recorded in 2008-2011 to 72.5 percent in 2014. Further, IEEFA sees that number falling to 60 percent by 2020 as China’s rapid diversification into lower-carbon alternatives gains steam.
We see it as no coincidence that China has recently announced two major policy moves that together suggest dramatic change/deterioration in the outlook for the global seaborne thermal coal market. China has moved explicitly to reduce coal export tariffs from 10 percent to 3 percent starting in January 2015. This follows the announcement in October 2014 that Beijing will impose a 6 percent import tariff on thermal coal (unless sourced from Indonesia, under the Asian bilateral free trade agreement). China was a net coal exporter before 2009, and IEEFA expects could reclaim that status later this decade.
Add to all these numbers Chinese press reports in December suggesting that Beijing is considering an end to approvals for new coal-to-gas (CTG) and coal-to-oil (CTO) projects as part of its next five-year plan for the industry. Given that the government had previously proposed a massive CTG and CTO program that would have required an additional 300 million tons of coal production annually, such a move would further erode the last main area of potential new growth for China’s domestic coal industry.
All of this is occurring, of course, at a time in which solar-efficiency records are being set every month, all around the world.
IEEFA stands by its forecast that global coal markets will mirror Chinese coal markets and that peak demand for coal will occur by 2016 globally, with a structural decline thereafter. These trends, combined with recent changes in currency markets and continued oversupply as new mines are pushed online, indicate that stranded assets associated with proposed greenfield coal-export mines and related infrastructure development remain an especially acute financial risk.
Tim Buckley is IEEFA’s director of energy finance studies, Australasia.
