Coal Scorched: Weakness Abroad – 3/31/16

If the U.S. is moving away from coal use, then producers will need to rely more on consumers abroad to drive future growth.

At the end of 2013, 45% of the world’s coal-fired power plants were in China, a heavy concentration of consumption in one nation that has made the coal industry especially susceptible to the nation’s recent slowdown in growth. As a result, use has flattened or dropped as power plants operate below half-capacity, while China has said it plans to cap annual consumption at 4.2 billion metric tons by 2020 meaning that China is not likely to drive demand back up to past levels.

Part of the turn away from coal comes from the devastating damage done to the nation’s water and air. Beyond the well-known dangers of smog threatening the health of citizens in most industrial areas, China’s power plants are worsening a severe water shortage in the northern part of the country, Greenpeace said in a report released Tuesday.

China’s coal use is forecast to fall more as Chinese President Xi Jinping pushes provinces to cut overcapacity, reduce emissions, and switch to cleaner energy sources. Consumption is also being weakened by a shift away from heavy industry to a services and consumer spending based economy. Demand is expected to decline 2% while prices remain low, according to Xu Liang, deputy secretary general of the China Coal Industry Association. After accounting for 64% of the country’s total energy use last year, coal use, allegedly, contracted 3.7% in 2015 and 2.9% in 2014, according to the National Bureau of Statistics. The country aims to eliminate 500 million metric tons of coal capacity by 2020, or about 9% of its total capacity.

As its economy transitions towards a post-industrial economy, China must deal with its excess industrial capacity and the laying off of workers during reforms. That means 1.3 million coal workers out of work, fermenting social unrest. Naturally, officials are seeking alternatives to cuts in places like the northern province of Shanxi, which depends on  industries related to the fuel for 80% of its economy, in spite of the central government’s commitment to curbing output. Many provincial leaders want to try keeping mines alive by shipping excess output overseas.

The “keep mines running at all costs” strategy is bound for failure given the likelihood of trade barriers against dumping and transport costs. China has already raised exports of steel, aluminum, and refined oil products at the expense of trade partners, and domestic producers in the US are already lobbying for retaliatory tariffs. Between tariffs and transport expenses, Chinese coal wouldn’t be cheap enough for excess to be absorbed abroad.

Even minimal additional competition from China is the last thing producers need. In two years, six U.S. miners declared bankruptcy as they were crushed by falling demand, rising debt, mounting environmental regulations, and competition from natural gas. U.S. coal production fell last year to the lowest in decades and is seen declining further.

The fossil fuel is likely to only stay a major part of energy mixes abroad since the only places still planning substantial amounts of new coal-fired power plant capacity are developing nations like Russia, India, and, in particular, China.

“While the amount of electricity generated from coal has declined for two years in a row, the industry has ignored this trend and continues to build new coal-fired generating plants at a rapid pace, creating an increasingly severe capacity bubble,” according to the report published by green groups including CoalSwarm, the Sierra Club and Greenpeace.

Since 2010, 473 GW of coal-based power capacity has been added (China with 298 GW; India with 101 GW), the study found.

new coal power

The most devastating development for coal is undoubtedly the rise of natural gas.

China Petroleum & Chemical Corp., one of the country’s state-run energy giants, is planning to double annual output by 2020 as the country pushes to use more of the cleaner fuel.

As the country cuts coal consumption, it plans to raise natural gas consumption to more than 10% of total energy use by 2020, according to China’s 2014-2020 energy development strategy released by the State Council. Last year, natural gas accounted for about 6%.

“The movement really picked up a lot of momentum,” ENN Energy Holdings Ltd. Vice Chairman Cheung Yip Sang said. “The higher burning efficiency of gas and government pressure for better emission standards will help convert more industrial users from coal to gas.”

Still, gains by natural gas may be limited, Cheung cautioned, as it’s unlikely China will lower prices further because they’re already cutting in to earnings by state-owned producers.

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