Japanese thermal coal consumption approaching long term decline

Japan is by far the largest thermal coal export destination for the state of New South Wales (NSW) in Australia, representing 45% of all NSW exports in 2018. As a result, any moves by Japan away from thermal coal have great significance for the NSW thermal coal industry.

In the run up to Japan chairing the G20 meeting in Osaka from 28-29 June 2019, the Japanese cabinet approved a long-term emissions reduction strategy which included a goal for Japan to be carbon neutral soon after 2050.

Even under a business-as-usual scenario, Japan’s coal-fired power capacity will go into decline from 2023

Even prior to this announcement, Japan was already on course to significantly reduce long-term thermal coal consumption on a business-as-usual basis:

• Japan’s pipeline of new coal-fired power plants has collapsed 64% in the last four years. From almost 12.7 gigawatts (GW) of projects in the pipeline at January 2015, the latest figures put the pipeline at under 4.6GW with more cancellations likely. Of the remaining capacity, 2.5GW is now in doubt.
• Thermal coal exports from NSW to Japan peaked in 2015 whilst NSW total thermal coal exports peaked in 2014.
• Even under a business-as-usual scenario, Japan’s coal-fired power capacity will go into decline from 2023, with plant closures accelerating in the 2030s and early 2040s (Figure i).
• Japan has 8.7GW of new coal plants currently under construction, but these will largely replace older units due for retirement - a situation often glossed-over by the Australian coal industry. In total, 8.2GW of old, subcritical coal plants are due for retirement in Japan over the next five years according to Global Energy Monitor data, based on an expected 40-year plant life. The new plants’ muchvaunted “efficiency” means they use less coal than old plants, so replacing old coal plants with new will contribute to reduced thermal coal demand.

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• Japan’s environment ministry announced in March 2019 that it would not sanction any more coal-fired power plants or upgrades to existing ones.
• Japan’s major power utilities are now prioritising renewable energy (solar, offshore wind) over coal-fired power. Coal may also face increased competition from Liquefied Natural Gas (LNG) in the longer term.
• The utilisation of Japan’s coal plants is set to decline significantly according to global credit rating agency Moody’s. Moody’s sees the utilisation of Japanese plants fall from a decade high of over 80% in 2017 to just over 60% by 2030 under the International Energy Agency’s (IEA) New Policies Scenario (NPS). Under the IEA’s Sustainable Development Scenario (SDS) the fall in plant utilisation is even greater, collapsing to an uneconomic 32% by 2030. Significantly, Moody’s states: “We see signs that the SDS is becoming increasingly likely.”
• Japan’s influential trading houses have recently made moves away from thermal coal, announcing an end to coal-fired power development and divesting from thermal coal mine investments, including in Australia. Major Japanese financial institutions are amongst the 114 global financial institutions to-date that have ceased lending to, or investing in, thermal coal and coal-fired power plants.
• Japan is not the only major market for Australian thermal coal that will go into long-term decline. NSW other major destinations (China, South Korea, Taiwan) are also set for a significant long-term decline in imports. Any increase in exports to smaller, Southeast/South Asian markets will not be enough to make up for these declines. Japan, China, South Korea and Taiwan together imported 90% of all 2018 NSW thermal coal exports.
• The idea that Asian coal-plant operators will switch to more expensive, higher energy Australian coal to reduce carbon emissions into the future is a myth. With renewable energy increasingly cheaper than coal-fired power, nations seeking to reduce carbon emissions will simply switch to renewables in the long term. In the shorter term, cost will be the key factor driving decisions over the energy content of coal to be imported which will favour cheaper, lower energy coal from Indonesia.

With demand for imported thermal coal in NSW’s big four export destinations to continue to decline, the market is set for long-term oversupply, lower prices and lower royalties.

Continuing to approve new thermal coal mines in Australia will add more production into an oversupplied market. A cessation of new thermal coal mine approvals represents a rational economic step in the face of a declining market.

Press release: IEEFA report: Australia’s key export market – Japan, moving beyond thermal coal

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