NS4960 Spring Term 2017 Coal Outlook: Structural Weaknesses

Overview I Oxford Analytica, Structural Weaknesses Hit Coal Outlook, December 3, 2016 After sustained price decline, coal prices recovered in 2016 outperforming both oil and natural gas Looking beyond President Trump’s support for US manufacturing, price spike largely result of thermal coal shortages because of production cuts in Indonesia and China These could be quickly reversed Price patterns generally reflect developments on both demand and supply

Overview II Price spike since summer 2016 returned many coal producers to a cash-positive position Cold weather will increase demand, pushing prices up throughout the northern hemisphere winter China likely to take further measures to increase domestic production Prices more than doubled in 2016 due to fact that: China coal imports have started to increase again, and Indonesian coal exports have been curtailed.

Supply/Demand I China Output Curbs Chinese coal imports third quarter 2016 up 33% year on year. Increase in demand for imported coal reflects Chinese government’s order in May to reduce the number of working days per year in coal mines from 330 to 276 Estimated to have cut Chinese coal production by 10% in first ten months of 2016 Government targeted cuts in coal production of 250 million tons in 2016 and realized 150 million tons by August Chinese electricity generation started to increase again increasing coal demand

Supply/Demand II Elsewhere in Asia Major coal importers Japan and Korea stocking up on coal for the winter Attracted shipments from Colombia and Russia which has tightened supply in Atlantic basin where coal prices have also risen sharply Exports from Indonesia, world’s second largest exporter have fallen Initially result of low prices Then unseasonal rains disrupted production

Supply/Demand III Supply Reaction Capacity in China could be brought back on stream qucly 74 mines already given permission for production at 330 days a year. High prices will increase production from illegal mines High prices certain to Attract Indonesian exports back to the market Increase U.S. exports -- these fell sharply in 2016 and contracted further in 2016 Significant spare capacity in Indonesia, but would need investment to be brought back into production Higher prices already prompted new investment in Mozambique and railroad investment to take Botswanan coal to coast for export

Supply/Demand IV Structural Decline Overall trends for coal remain negative Coal demand falling both in Europe and US Generating plants switching to natural gas or renewables due to climate change concerns and regulations Political developments could affect these trends Brexit Might provide UK chance to pursue an energy policy more independent of EU emissions and environmental regulations No sign yet government likely to move away from current policies that point to further coal plant closures

Supply/Demand V Trump Election positive news for US coal industry However even if President Obama’s Clean Power plan is scrapped 10-15 gigawatts of coal plants expected to close each year until 2022 because they are old and uneconomic Trump has promised to deregulate oil and gas industry which would intensify pressure on coal from cheap natural gas

Assessment Ability to increase supply in the short term is limited but higher Chinese production could start to have an effect from early 2017 on On demand side, cold weather would add to the price spike Indonesian producers likely to await impact of changes on Chinese policy before spending to bring more production back on line Higher coal prices relative to natural gas will encourage coal-to-gas switching and therefore hasten coal’s declining share of electricity generation over long-term Price spike appears to have sparked renewed interest in output expansion in southern Africa.