You’d be forgiven for thinking that all is well for coal mine owners
Reading the latest thermal coal demand forecasts from the Australian Government’s Office of the Chief Economist (OCE), you’d be forgiven for thinking that all is well for coal mine owners in Australia, South Africa and Columbia.
The OCE’s medium-term forecast, presumably written before the worst impacts of coronavirus became known, sees South African exports recovering from a drop in 2019 to reach 92 million tonnes per annum (Mtpa) by 2025, an average annual growth rate of 2.9%.
This is despite the OCE forecasting a drop in India’s thermal coal imports of 2.2% per annum out to 2025. India is by far the largest destination for South African thermal coal exports.
The Indian government has once again emphasised a desire to dramatically reduce reliance on imports as Coal India’s domestic output starts to ramp up, and new commercial mine operators come on line at scale to bring new domestic competition. Most recently, the central government has asked both Indian states and NTPC Ltd to reduce reliance on thermal coal imports.
India’s target of ending thermal coal imports by 2023-24 looks unachievable but the likely significant reduction will have major repercussions for South African exporters, and the supply-demand imbalance will influence global pricing as a result.
DESPITE FORECASTING LOWER INDIAN THERMAL COAL IMPORTS, the OCE sees South Africa increasing its exports to India, in addition to Pakistan and South Korea, yet the OCE also forecasts that overall South Korean thermal coal imports will fall by 2.2% per annum. How South Africa is expected to steal South Korean market share off Indonesia, Australian and Russia isn’t made clear by the OCE.
The supply-demand imbalance will influence global pricing
Meanwhile, on the ground the increase in South African exports to Pakistan looks to be largely over with the Pakistan government clearly concerned about the economic burden of imports and coal plant proposals changing plans to use domestic rather than imported coal
The OCE’s reasoning on South African exports appears to be that mining companies there are planning to increase production. However, the idea that further production will undoubtedly find a buyer in a transitioning energy market looks too simplistic.
Similarly, the OCE forecasts that Columbian thermal coal exports will recover in 2020 after a significant drop the previous year and then be maintained at 80 Mtpa out to 2025.
Average annual import declines are forecast to be larger
This may be news to the CEO of the Cerrejon coal mine in Columbia, owned by BHP, Anglo American and Glencore, who noted last year that the industry is in terminal decline and may result in the potential closure of a large part of Glencore’s Columbian thermal coal mining efforts entirely by 2035, after taking US$949m of write-downs on this unit last month.
Australian thermal coal exports – Vietnam to the rescue?
Despite the OCE forecasting that thermal coal exports to Australia’s main markets will drop, it also sees overall Australian exports rising out to 2025.
Imports by Japan – Australia’s largest thermal coal export destination – are forecast by the OCE to remain broadly flat, declining at 0.2% per annum out to 2025.
The global energy transition towards renewables is now making an impact in Vietnam
For the other major destinations that make up Australia’s ‘big four’, the average annual import declines are forecast to be larger; -1.7% per annum for China, -2.2% per annum for South Korea and -1.7% per annum for Taiwan.
The OCE sees Southeast Asia, and Vietnam in particular, saving Australia’s thermal coal export future.
Certainly, Australian exports to Vietnam have grown significantly recently, albeit from a low base. However, the global energy transition towards renewables is now making an impact in Vietnam as it has in developed nations.
VIETNAMESE RENEWABLE ENERGY ADDITIONS HAVE GROWN DRAMATICALLY and the difficulty in securing finance for new coal plants is starting to bite.
We have observed continued coal plant proposal cancellations and increasing renewable energy ambition over the last decade
Earlier this month, Vietnam’s National Steering Committee for Power Development advised the government that the nation’s coal power ambition should be significantly scaled down and 15 gigawatts (GW) of planned power projects be abandoned, in part due to difficulties in securing finance and sustained local opposition to new plants.
This recommendation was acknowledged in the OCE’s latest report which also highlighted potential downside risks to its Vietnam outlook.
However, at IEEFA we have observed continued coal plant proposal cancellations and increasing renewable energy ambition over the last decade. The trend is locked in and the downside risks will look more and more like reality as time passes.
NEW COAL PLANT FINANCING IS EVAPORATING IN ASIA. The ruling party of South Korea this month proposed ceasing all new coal related financing as a core to its Green New Deal proposal, and China’s two largest development banks’ outbound power generation financing fell by two-thirds in 2018, and down another 68% in 2019.
Once again, some of the OCE’s basis for increased thermal coal exports out of Australia are founded on the fact that miners are planning to increase capacity. Given it is forecasting broadly stable coal prices out to 2025, the OCE sees no problem for Australian miners in finding customers for any additional supply.
A more likely scenario is that Australia, Indonesia, South Africa and Russia will increasingly be eating into each other’s markets
However, if China and India significantly reduce reliance on imports to the degree they are signalling, and miners increase production as the OCE is suggesting, a more likely scenario is that Australia, Indonesia, South Africa and Russia will increasingly be eating into each other’s markets in an effort to find destinations for their thermal coal.
IN THE SHORT TERM, THE CORONAVIRUS WILL REDUCE ECONOMIC ACTIVITY and power demand, likely resulting in reduced demand for thermal coal in some of Australia’s major export markets.
In the longer term however, the reduction in thermal coal demand in Asia will be driven by the continuing and unstoppable energy transition being driven by ever-cheaper renewable energy and associated grid firming technologies like batteries.
Over-optimistic thermal coal demand forecasts will lead to poor planning by governments and the industry, and hinder regional preparations for the ongoing energy transition.
Simon Nicholas is an Energy Finance Analyst with IEEFA