LONDON, February 26, 2015 – China’s total coal consumption fell by 2.9 % in 2014 compared with the previous year, official figures showed today, the first time this has happened since the turn of the century. As China accounts for half of the world’s annual coal consumption, the fresh figures could give the clearest indication yet that the global coal market is in structural decline.
China became a net importer of coal in 2009, creating optimism in the coal sector that Chinese demand growth would support a strong seaborne market for decades to come. With coal demand in OECD markets already declining, all coal producers from Australia and the US to Indonesia are looking for alternative markets for their products.
“Chinese thermal coal peaking is like changing the direction on an escalator. It will be a shock for those who assumed the direction would always be up,” said James Leaton, research director at the financial think-tank the Carbon Tracker Initiative.
China’s calendar year 2014 coal imports fell by 10.9% compared with 2013. With China’s demand for seaborne coal having reached a turning point, it appears a lifeline for the beleaguered traded coal market has been severed. Coal producers appear to be missing this trend, however, with Peabody Energy, the largest producer in the US, revealing in their 8K report their expectation for ‘global coal demand to rise 500 million tonnes by 2017…an 8 to 10% increase in seaborne thermal coal demand’.
The seaborne coal market is already in a state of over supply due to lower-than-expected Chinese demand. The new figures will only exert more downward pressure on faltering prices. Australian thermal export coal prices fell by 25 percent in 2014 and hit a new low of $57 per tonne in January. Carbon Tracker’s “Coal supply Cost Curve” study published last year found that approximately $142 billion of future investment (capex) in coal mines for export to 2025 requires a $75 per tonne breakeven price to make a return. Producers in countries like Australia and Indonesia are heavily exposed. Currently, seaborne traded prices are significantly lower than this breakeven price, so the actual capex at risk is much higher.
“China’s ability to demonstrate it can redirect its juggernaut of an economy away from a coal growth trajectory sends a signal that other countries need to step up to the plate,” said Anthony Hobley CEO at Carbon Tracker.
China is prioritising ‘quality over quantity’ in economic planning and Premier Li Keqiang’s pledge at the World Economic Forum in Davos to reduce the fossil fuel proportion of China’s total energy mix while promoting clean technologies is central to this goal. Li said renewables would be increased by 20% by 2030. The lower demand figure shows efforts to shift its economy and energy supply away from polluting coal is having some effect.
For example, while China’s GDP grew 7.4% in 2014, China reduced its energy intensity of GDP by 4.8% as it transitions towards a more service-based, and less carbon intensive, economy. Moreover, China added 20GW of wind capacity, 11GW of solar and 22GW of hydropower capacity in 2014. One Gigawatt of electricity is enough to roughly supply some 750,000 homes.
Nevertheless, despite its clean energy ambitions, China is still currently reliant on coal. It added 47GW of predominantly coal-fired thermal generation capacity in 2014 in spite of coal’s reduced share of power generation. If China continues on an investment trajectory akin to the early 2000s it risks creating vast quantities of stranded coal assets.
This potential asset bubble was at the heart of Carbon Tracker’s ‘Great Coal Cap’ report which showed that hundreds of gigawatts of coal-fired power capacity risk becoming stranded if investments keep being made while coal demand peaks earlier than expected.
Whether 2014 will prove to be the long-term peak for Chinese coal demand, only time will tell. However, this does appear to be a significant moment for China’s energy sector, the future of which increasingly seems away from coal.