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Data Bite: Global Transition Occurring Faster Than Expected

February 10, 2016
Tim Buckley

What does it say that Indian coal imports fell 28.6 percent year over year in January 2016 and U.S. coal production was down a record 32.4 percent?

For one thing, it says that expectations that 2015 was the low point in the thermal coal cycle are already looking severely misplaced. January completes the largest three-month decline on record in coal imports to India, following drops of 49 percent in November and 34 percent in December.

Indeed, the rate of Indian coal import decline is increasing every month after five years of 20 to 30 percent annual growth—and the trend signals an historic turning point in the country’s energy market transformation.

The shift is in line with the 20 percent decline for 2015-16 forecast by Indian Coal Secretary Anil Swarup, who noted not so long ago that the shift is no accident: “Increased production by Coal India Ltd results in decrease in import of coal.”

With Coal India and coal fired power plant both notching record inventory levels in January, and with solar power project construction occurring at record rates, IEEFA sees Indian coal imports continuing to decline over 2016.

The global coal industry continues to reel under the twin pressures of excessive financial leverage and a technology-driven transformation that is increasingly transferring pricing power from global fossil fuel conglomerates to energy consumers.

The result? Accelerating energy-sector deflation around the world across oil, liquid natural gas and coal.

MEANTIME IN CHINA, THE GOVERNMENT HAS ANNOUNCED PLANS TO CLOSE 1,000 MILLION METRIC TONS OF SURPLUS COAL CAPACITY and is imposing a three-year moratorium on new mine construction. In the background, China Railway is cutting its coal freight rate by an estimated 10 percent to bring some cost pressure relief to the Chinese coal-mining sector. It is one of a series of initiatives that will continue to place globally traded coal prices in structural decline. Cutting coal railway costs adds to the collapsing price of oil, the sustained depreciation of global export nation’s currencies (witness the near 60 percent decline in the Russian ruble versus the U.S. dollar) plus an ongoing drive for greater workforce productivity and workforce reductions.

Put another way, the global cost curve for coal continues to decline.

Changes in China are occurring as Australia keeps reporting record high volumes of coal shipments, a trend serving only to push global coal prices to new record lows.

In the U.S., the January coal production collapse is of a piece with the federal government’s Energy Information Administration report detailing how rail freight shipments of coal in January were down 37.5 year over year.

And in a new report, Bloomberg New Energy Finance estimates 14 gigawatts of U.S. coal-fired power plants closed over 2015. That amounts to 5 percent of the entire U.S. coal generation fleet. Further closures have already been announced for over the rest of this decade, and the inevitability of the decline of coal-generated electricity is reflected in the rapid technology driven productivity improvements that are driving U.S. natural gas prices to record lows.

As natural gas replaces coal, the U.S. is installing more renewable-energy capacity—a near record 16.4 gigawatts in 2015 alone. Coal has dropped from a 49 percent share of U.S. electricity generation in 2007 to a record low 34 percent in 2015. IEEFA sees that number falling to below 30 percent by 2020.

Meanwhile, U.S. electricity demand has been stagnant since 2007, indicating a critical decoupling from economic growth. Similar trends are increasingly evident in China, Japan, Europe and Australia.

Finally, the futures for Newcastle thermal coal exports are now priced to decline to a new decade low of US$42.15/per metric ton by end 2022.

What’s it all mean?

It all means global electricity markets are transforming a great deal faster than anyone expected.

Tim Buckley is IEEFA’s director of energy finance studies, Australasia.

Tim Buckley

Former Director Energy Finance Studies, Australasia, Tim Buckley has 25 years of financial markets experience, specializing in equity valuation, including as a top-rated analyst and as co-founder and managing director of Arkx Investment Management.

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