G-7 pact cements long-term coal market decline
The first major El Nino weather cycle to hit the world in six years is propping up the price of coal in Asia, but any market euphoria will be restrained by a recently signed pact between leading industrialized nations to phase out fossil fuels.
The price of coal has risen 13% from its five-year low of $55.25 in April to $62.50 on June 18. But once the abnormal weather conditions caused by El Nino have swept through, Asian countries dependent on fossil fuels for export income will be staring at a sunset industry.
The G-7 agreed on a pact in Germany in early June to cut global carbon dioxide emissions by 40-70% by 2050 from 2010 levels. This comes on the back of last year’s landmark climate deal between the U.S. and China, sounding a death knell for the coal industry.
Last November, China’s President Xi Jinping promised his country’s carbon dioxide emissions would peak by about 2030, while his U.S. counterpart Barack Obama pledged to reduce CO2 emissions by 26-28% by 2025. China and the European Union will meet June 29 in Brussels with a view to making a similar pact.
It is clear now that the long reign of old “king” coal is slowly but surely ending.
Over the last few years, the Asian coal market has already started to cool as the world began a shift toward cleaner energy against a backdrop of environmental concerns, extending a trend that began in the more developed West.
In the push to lessen reliance on fossil fuels, coal is being replaced by gas, which produces fewer pollutants, in a string of new power stations across the globe. Even China, the world’s biggest emitter of greenhouse gases, has closed down small coal power plants earlier this year as domestic consumption continues on a downward trend. Chinese imports have slumped, recording a 37.7% fall in the first four months of this year compared with the same period in 2014.
The fall in Chinese imports has a direct impact on Indonesia and Australia, the world’s largest coal exporters, which in 2013 accounted for 59% of global exports.
On a micro level, high coal prices in the decade before 2011 had led to tens of billions of dollars in investments in new mine and port capacity, especially in Australia.
But in the new world order, miners across the world have been forced to make production cuts and even major producers like Switzerland’s Glencore and Canada’s Peabody Energy have mothballed mines. Traditionally the biggest supplier of Australian coal to Japan, Glencore announced it would cut its 2015 production by 15% in February.
Already under pressure from national clean-energy strategies, coal was also suffering the contagion effects of a global commodities crunch. By May 2015, the price of thermal coal quoted on the Asian benchmark Newcastle Index had fallen by more than half to $61.49 per metric ton from its peak of $136.30 in January 2011.
The Reserve Bank of Australia captured the uncertain outlook of the industry with these words: “The outlook for prices and production over the next few years depends on a number of factors, particularly the response of Chinese demand to policy measures.”
In the near term, the coal market is moving against the trend of decline, as the early arrival of El Nino in the Pacific has already had an impact on the vast area from India to the Korean Peninsula. Australia’s Bureau of Meteorology said that El Nino hit a month earlier than usual in May and the hotter and drier summer is felt across Asia.
This weather anomaly is wreaking havoc across commodities markets and particularly for coal, El Nino is giving a much needed shot in the arm as demand for air-conditioning spikes, pushing up its price.
And there is further upside. Morgan Stanley forecast another 10% increase in coal demand by August from the current level. The investment bank said China will power that increase in coal demand as residential power consumption is seen surging by 20-30%.
But the coal price rise is unsustainable beyond the next few months, as the G-7 fossil fuel plan takes shape. The G-7 plan does not only target coal but oil and gas as well. Regional countries will begin to feel the pinch if they had not had the foresight to re-balance their exports. Malaysia, Brunei and Myanmar — as well as Australia and Indonesia — will move into the frame, and Singapore will need to rethink its vast oil processing apparatus.
Such plans, of course, are already paving the way for alternative fuel sources such as solar and wind. One commodity set to benefit is uranium, as countries look once more to nuclear power. China already has 21 nuclear power plants and is considering lifting a freeze on the development of nuclear reactors following Japan’s Fukushima disaster, brought on by an earthquake and tsunami in March 2011.
Australia has significant deposits and together with the world’s two biggest miners of the commodity, Kazakhstan and Canada, produces two-thirds of the world’s uranium, according to the World Nuclear Association.
The narrative around the eventual removal of fossil fuels will come into focus when the United Nations Climate Change Conference is held in Paris, from Nov. 30 to Dec. 11, 2015. There will be an attempt to ink a global treaty to succeed the Kyoto Protocol, which is due to expire at the end of this year. That will mean more bad news for coal miners.
In the meantime, the crown of old king coal is already beginning to wobble.