What Asia's cooling demand for coal means for industry
Asia’s dramatic, unexpected coal demand drop could be final nail in coffin for U.S. Coal.
Earlier this month, Vietnam announced that it was abandoning its previously ambitious coal power plant plans in favor of “accelerated investment in renewable energy,” followed by news that India’s coal imports dropped by a much-higher-than expected 35 percent last year due to massive oversupply and a quicker-than-expected expansion in renewables. These countries were expected to make up for China's sharp drop in coal imports over the past two years.
“With the collapse in both Indian and Chinese coal imports, the seaborne thermal coal industry is now entirely beleaguered,” said Tim Buckley, Director of Energy Finance Studies for Australasia, at The Institute for Energy Economics and Financial Analysis (IEEFA). According to Buckley, the global coal market is doomed to low prices and oversupply. “This telling import data confirms that the last flicker of hope for a recovery in seaborne thermal coal markets has been snuffed out.”
The drop in demand for coal in Asia, more than what's happening in the United States, is a sign that low-prices and oversupply of coal are here to stay, which will severely limit future financial prospects of major American coal companies who were planning on growing exports to Asia.
The U.S. is a major coal power with the world’s largest known reserves, and is the second largest coal producer in the world after China. Despite this energy bounty, coal demand has slowed domestically due to environmental pressures and cheaper prices for natural gas and, increasingly, renewables. However, Asia was expected to fill in the gap, with huge population and rapidly growing energy demands, particularly for the baseload power that coal could provide. That was why, in the early 2000’s, there was a big push to build coal export facilities along ports in the Oregon, Washington, and California to meet this expected demand.
One of the biggest projects was Peabody Energy's (NYSE: BTU) plan to build an export terminal in Washington that could send up to 24 million metric tons of coal to Asia. Along with other ports in the Pacific Northwest, this would have nearly doubled U.S. coal exporting capacity. Due to legal challenges, these projects remain in the planning phase. Initially, it was local opposition from health and environmental advocates that delayed the construction of these ports, but now, it is the realization that demand in Asia will not be big enough to support anticipated coal exports, and, according to Hiran Bhadra, severe logistical challenges that made exporting U.S. coal to Asia challenging even when prices were high.
“This has more to do with rail connectivity that it has to connecting mines to port - business feasibility of in-land transportation is yet not clear to me,” said Hiran Bhadra, Principal, U.S. Mining & Asset Management, KPMG.
In fact, coal exports were an important component of the coal industry’s business, with 27 percent of West Virginia coal going overseas in 2012, when coal exports peaked. That number has shrunk substantially, as in 2014, coal exports totaled just 74 million short tons, a huge drop from 125 million exported in 2012. 2015 numbers are expected to be even worse.
This double whammy, of weaker domestic consumption and oversupply globally, resulted in coal stocks being among the worst performing in 2015, with Zack’s Equity Research ranking coal at 210 out of 258 industries. Similarly, Bloomberg found that coal bonds were severely under-performing their gas and oil counterparts. Analysts are not expecting any change in the new coal market reality.
“Weak Chinese demand takes a sustained price recovery off the table for most commodities,” said Daniel Rohr, a senior equity analyst at Morningstar, speaking about coal, copper, and iron ore. “We now expect seaborne thermal coal prices to average $67 per metric ton for the remainder of the decade, down from a $94 trailing five-year average.”
This slowdown will continue for some years, as currently, the fall in demand is for coking coal, used mostly in steel production. Thermal coal, which is used in power plants, will likely follow.
“The slowdown in China will impact plant construction three or four years from now,” said KPMG’s Bhadra.
China’s slowdown in demand was not altogether surprising, especially in light of the horrific smog that has engulfed the country’s cities in the past few years. But the big surprise is that Asian countries like India and Vietnam are not using coal as much as expected as they both grow their energy sectors. The recent Paris Agreement signed at the COP21 climate talks may be partly responsible, as it requires massive, short-term shift to cleaner energies, particularly in large emerging economies.
“Vietnam is playing its part in kicking our global addiction to coal. With Indian coal imports falling and China implementing a three-year ban on new coal mines, there is a definite sense that change is in the air in Asia,” said Arif Fiyanto, Greenpeace Southeast Asia Coal Campaigner.
Coal is responsible for 44 percent of global CO2 emissions. If the slowdown is due not just to economic pressures, but to greater awareness of environmental concerns, it could mean what we’re seeing is not a short-term blip, but a long-term shift.
Coal production has not yet caught up to the slower demand, hence, oversupply and depressed prices. From a peak of above $200/ton in mid-2008, today coal prices are now below $50/ton, with the International Energy Agency not expecting any recovery in the short-to-medium term. According to Bloomberg Intelligence, American coal exporters are facing increased challenges due the stronger dollar, as compared to Australian exporters. Chinese producers are being impacted as well, with the Government recently announcing a plan to shut down 4300 mines across the country. Even this might not be enough to reduce supply within China, not to mention globally.
“Coal is on its knees,” said Tom O’Sullivan, founder and chief analyst of Mathyos, to South China Morning Post. “Declining usage in China, and environmental issues in the developed, particularly U.S., and developing worlds may be putting unprecedented pressure on the sector.”
Companies to Watch
* Peabody Energy (NYSE: BTU) as of last year the world's largest private-sector coal company, and some analysts expect it to follow its rival Arch Coal into bankruptcy. Currently 6 analysts have SELL recommendations on Peabody Energy.
* Duke Energy (NYSE: DUK), is one of the largest electric power holding companies in the United States, with significant assets in coal-fired power plants, but also gas and some renewables. Duke Energy has a HOLD recommendation from 10 analysts.
* Kinder Morgan (NYSE: KMI) is a major operator of energy infrastructure, including coal ports. It partnered with Arch Coal on its unsuccessful Pacific Northwest coal terminals plans, and does export coal to Asia through southern ports. Kinder Morgan has an analysts consensus BUY recommendation due to its continued strength in oil and gas transport.
Nithin Coca is a freelance journalist who focuses on energy, environment, and economic issues in developing countries, and has specific expertise in Southeast Asia. Nithin's feature and news pieces have appeared in global media outlets including Al Jazeera, Quartz, Atlantic Cities, SciDev.Net, Southeast Asia Globe, The Diplomat, Penang Monthly and numerous regional publications in Asia and the United States