1. NS4960 Spring Term 2017 Coal Outlook: Structural Weaknesses

2. 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

3. 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.

4. 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

5. 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

6. 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

7. 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

8. Supply/Demand V Trump Election positive news for US coal industry
However even if President Obama’s Clean Power plan is scrapped 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

9. 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.