NS4960 Spring Term 2018 Fundamentals Will Curb Coal Oxford Analytica, Foul Fundamentals Will Curb Coal, June 2017

Overview I Coal prices rallied by more than 70% in 2016 Reversed five years of falling prices

Recent Developments I Recent developments Coal imports by Pakistan, Turkey and several ASEAN nations will rise to 2021 In part checks the deceleration of seaborne thermal coal trade The Panama Canal expansion is allowing Colombia to export more coal to Asia and trade flows should increase as the route gains traction Mines restarted in Indonesia and Australia at the end of 2016 These will remain exception to the longer trend of declining supply

Recent Developments II Recent developments (contd.) The Chinese government is eliminating 500 metric tons (mt) of its coal capacity or 13% of domestic production. No new Chinese mines will be opened until at least 2019 However Chinese government’s decision in April 2016 to limit annual production to 276 days reignited seaborne coal trade Chinese imports rose by 40mt in 2016 Bottlenecks in global supply and distribution also supported higher prices

Government Actions I China China’s 13th Five Year Plan set a target for reducing proportion of coal-fired power in overall energy mix by 4% to 55% by 2020 To achieve this at least 150 gigawatts (GW) of capacity is being cancelled or postponed In 2017 government also ordered cancellation of more than 100 coal-fired power plant projects in 11 provinces Only producers in western regions will be allowed to raise capacity

Government Actions II India Output of Coal India Limited produces 80% of Indian coal Production rose by 9% in 2016 aided by reforms targeting bottlenecks in the distribution and supply chain Power sector recorded 3.3% surplus in electricity supply despite importing 20% less than the year before India’s share of world output expected to increase from around 10% to 12.7% by 2020 Will surpass the U.S. to become the world’s second largest producer of coal Seaborne volumes will stagnate due to Lower import demand from India, and Uncertain prospects for Chinese demand

Government Actions III Indonesia Indonesia expects to increase coal production by 7.5% per year until 2020 Country’s electrification program aims to add 35GW of electricity supply Nearly 20GW will come from coal-fired plants Australia Indonesian thermal coal shipments to China are exempt from import tax under a bilateral free trade agreement However Australia is competitive in Chinese market because the China-Australia Free trade agreement reduces the tax on imports of coal to 2% from standard 6%

Government Actions IV Russia Colombia, Russia and South Africa will still pay 6% on their imports into China With European demand uncertain, Russia in particular will seek to export more coal to the Pacific Basin, targeting China and Especially Japan.

Government Actions V Global Pledges France has pledged to shut down its coal-fired power plants by 2023 Germany also plans to limit use of coal in power generation by 50% by 2013 and to be coal-free by 2050 Austria targeting using renewable energy for 34% of its power generation by 2020 and aspires to be come coal-free beyond that. Countries that have planned to phase out coal by 2030 include Netherlands Finland and Canada

U.S. Developments I Trump administration is coal friendly but is unlikely to boost coal-fired power plant capacity meaningfully Such plants Take up to four years to build and Have an expected life of around 40 years Any near-term investment decisions will be taken with a long- term view on future energy policy Completion also from more modern plants fed by natural gas Gas fired plant can be started up in 15 minutes and reach full potential within five hours A coal plant takes up to 7 hours to start and 12 hours to reach full power

U.S. Developments II Coal’s advantage has been relative affordability in comparison to natural gas Cost advantage being eroded with shale gas U.S. power producers have been retiring older coal-fired plants built between the 1950s and 1970s and replacing them with more flexible gas units. Ninety four coal plants have already been closed Another 41 plants were closed in 2017

Innovations I Clean coal Important initiatives include Clean coal technologies have been around for 10 years or so Have yet to become commercially affordable on a large scale Important initiatives include Carbon capture and sequestration (CCS) – the carbon emissions are stored underground and Carbon capture utilization (CCU) – captured carbon is used to produce useful materials (e.g., soda ash)

Innovations II Japanese Innovations Since Fukushima nuclear disaster country planning 45 new coal plants Using state-of-the-art high efficiency Low emissions (HELE) technologies Japan is planning to export the technology to developing countries In addition the World Coal Association has set up studies to help raise the efficiency of coal-fired plants and minimize CO2 emissions

Assessment Seaborne thermal coal market will continue its structural decline driven by Environmental regulation and The rise of renewable energies Indian demand will continue to fall while Chinese demand may also ease holding down prices However higher supply is equally unlikely Persistent low prices will discourage mining companies from increasing output Only way US miners are likely to reap direct economic benefits form the pro-coal administration in Washington is if The dollar weakens and Prices rise in Europe