Coal’s last breath?

The coal sector has been affected for a long time by an excess of capacity, especially during the last two years, with the slowdown of the economy and the drop in demand caused by the measures taken against climate change and the focus on renewable energies. However, in recent months the coal market experienced a significant rise. In this article, we aim to explain the causes behind this surge.

The COP21 Summit, held in Paris at the end of 2015, focused especially on pollution caused by the energy sector, and in particular by the coal industry.

China – Road to clean energy

China has been the largest producer of coal of the last three decades. It currently produces 47% of the global coal supply. The country consumes more than half of the total consumption of coal in the world. Worldwide, China holds the third biggest reserves of coal. According to some estimates, China uses half of its coal supply for power generation, which represents more than 80% of the electricity produced in the country. The Asian giant aims to reach energy diversification by making a major commitment to renewables and slowly trying to stop relying on coal.

For this reason, the Chinese Government is taking measures to optimize the coal sector. At the beginning of this year, it implemented some measures to improve its highly polluting industries. At the same time, the Government is struggling to keep employment stable. The goal they want to reach is a capacity reduction of 250 million tons during this year, and expanding the amount to 500 million of tons for the upcoming years. Obviously considerable funds are needed in order to allocate the employers no longer needed in the coal sector, because of these measures.

China’s coal production fell 10.2% on the first 8 months of the year, to stand at 2,180 million tons. However, this drop represents only 38% of the reduction target.

The fact is that, today we believe that China’s efforts to reduce oversupply within the coal industry, may have worked too well. In both Asia and Europe, reference prices rose more than 50 percent this year after the implementation of these measures. The reduction of Chinese domestic supply has forced to raise the demand for coal, coming from North Korea, Indonesia, but especially from Australia (they are key suppliers for China, and their prices are the main benchmark prices for Asia).

Not all is China

However, China has not been the only reason for this rise in prices. Among the other factors that kept prices up there are the rise in demand coming from South, and emerging markets, as well as the cut of production in Indonesia, due heavy rains that hindered extraction processes, and Australia derailments of trains. Furthermore, a rising oil price have contributed to the recovery of coal.

The United States, the second world’s producer (12%), is also experiencing a drop in its coal exports because China and India, two of their biggest clients, have chosen to produce its own coal rather than import it from the United States within the context of reducing consumption in general.

In addition, the winter season is approaching and the demand for fuel is increasing with in order to avoid possible shortage in the supply.

Black future for coal

The problem of coal is that, basically, the coal industry has not followed the pace of technological advances in the industry of natural gas in particular, and in the field of energy in general.

While the heat factor (a measure of efficiency) of the coal power plants remained practically constant, the intense work of R&D in gas combined cycle turbines is leading to heat with factors that are a 40% better than coal generators. In addition, the combined cycles offer greater agility in case of an increase in demand or possible interruptions, which represents an advantage in the reliability of such technology.

Among the cons of coal, there is for sure the ecological damage. Consequently, it is essential that Governments discover innovative technologies to improve the extraction and processing of coal, also taking into account elements such as efficiency and environmental sustainability. The idea is to find a long-term solution that will allow coal industry to respond better to future global challenges.

To conclude, the current situation of high coal prices has been caused by a mix of different factors such as: the recent increase of crude prices, the weakening of the pound, and the lack of imports of LNG that have coincided with a colder than normal weather. In addition, nuclear cuts in Europe, are keeping power prices up. Certainly, a perfect storm of rising commodities prices, weakening currencies and not favorable weather are confirming that this bullish trend has come to stay, at least, for a year.

The coal industry may be facing an uncertain future. Coal will still be playing a major role in the global energy mix next years. However, in order to reach Europe’s climate targets, there is no other way than phasing out coal as a source of energy.

Sonia Díaz | Energy Consultant