The end of the coal boom?

The sharp drop in the price of coal over recent months might be just one of the fluctuations that go on all the time in commodity markets. That’s the preferred view of Fitch Ratings cited by Coalspot, saying “the weakness seen in thermal coal prices in recent months should reverse once demand from major importers recovers”. On the other hand, though “there is a risk low prices may persist into 2013, changing the industry’s supply side dynamics.” The crucial point is that most coal contracts are negotiated annually, so suppliers can ride out months, but not years, of low prices.

News from the US today increases the likelihood of a sustained drop in prices. The US Court of Appeals delivered a complete and unanimous rejection of an attempt to block regulation of CO2 emissions by the EPA, under the Clean Air Act. That could be overturned if the Repubs make a clean sweep in November, but otherwise it means, for practical purposes, the end of new coal-fired power plants in the US, and the shutdown of many existing plants. As noted in the Fitch report, declining US demand for coal is already pushing US coal onto world markets, contributing to the declining price.

Fitch is optimistic about demand from China and India, but there’s plenty of room for doubt about China. Not only does it appear that economic growth is slowing, but China is giving a lot of support to renewables which are now the focus of an incipient trade war with the US, and may also be expanding doemstic coal production. From whatever cause, coal is piling up on the docks.

The situation for metallurgical coal is a bit better, but not much. Iron ore and steel prices are also weakening, despite a recent rally.

What does this mean for Australia ?

Very little, according to the Bureau of Resources and Energy Economics, which predicts soaring growth in exports of both coal and iron ore, at least for next year.

The BREE analysis is based on the fact that a lot of projects are already at an advanced stage. But if a soft demand outlook is combined with a locked-in expansion of supply, that must cast doubt on the viability of projects that are at an early stage. It’s worth bearing in mind that Chinese domestic supply has the potential to grow rapidly, and there are plenty of projects under way in Indonesia and elsewhere.

In employment terms, the big effects of the mining boom have arisen from projects in the construction phase – mining itself is much less labour-intensive. So, even if output continues to grow, employment in the sector could decline if the pace of construction falls off.

I’m not sure about implications for exchange rates. It seems that the exchange rate is driven mainly by capital flows these days, so if inward investment fell, the $A might depreciate, even with minerals exports remaining strong. That would be good for producers of other traded goods and services, and would help to rebalance the economy.

I haven’t discussed implications for climate change. Obviously these depend critically on whether any decline in world prices is driven mainly by declining demand (in which case emissions will fall) or by increasing supply (in which case they will rise).

28 thoughts on “The end of the coal boom?

  1. Are China and India slowing economically or replacing coal with substitutes? Note Clive Palmer proposes to call his new export coal mine ‘China First’. Recently Chinese CO2 emissions have been revised from 8.2 billion tonnes out of a world total of 30.6 to 9.1. Australia’s emissions are 0.5 billion tonnes net CO2e.

    A reduction in coal burning by China and India will dwarf any piddling CO2 cuts by Australia. Noting that a slowdown is not yet a reduction we should encourage them further. Perhaps we could invite them to pay carbon tax voluntarily on Mr Palmer and Ms Rineheart’s excellent coal. The revenue would be refunded to Chinese or Indian green programs to achieve revenue neutrality. Perhaps these countries took note of Australia’s determination and were inspired to follow suit. Or maybe it’s just a global downturn that has nothing to do with carbon policies.

  2. What should be remembered in all this, is that the losses to the economy due to coal abandonment are, to some extent, countered by the growth in services exports such as education exports.

    With CO2 issues added in – the net result is probably small. It would be interesting to get some data on the employment intensity of our various services exporting industries. I suspect it is weak outside hospitality. In hospitality – it generally produces low grade jobs but, in addition, some career options.

  3. Newcastle Port authorities have recently postponed for two years building a fourth coal loader at Australia’s largest coal export terminal. Still plenty of coal bulkships waiting offshore to load, but a fair bet the postponement is forever.
    Reality coming home to roost?

  4. Its always worth remembering what a coal company executive said to me recently when I mentioned the fabled twenty contracts etc for coal from Australia. “Let me tell you something about twenty year contracts. One day something changes and then the ships just don’t turn up.”

  5. Any reduction in coal use by developed counties will put downward pressure on coal prices and encourage additional use in developing countries like China and India. There will be general macroeconomic carbon leakages. Its important that new coal projects around the world which have medium to high costs not come into operation. Buy them back, as some have suggested, and keep them unused. Of course pressure should also be maintained on poorer countries to switch away from coal or to switch to using CCS.

  6. World annual coal consumption by year (1980-2010) firmly indicates that rapid growth in coal use has been the basic pattern since 2000. Within that pattern there was a downturn following the GFC and this was followed by rapid growth of a “catch-up” character in 2010. If another downward blip in coal use is in the pipeline, I would suggest it is because the second part of a double-dip recession or GFC is in the pipeline as well.

    It defies belief that any energy prices will stay low consistently in an increasingly energy hungry world. Economic growth is firmly tied to energy consumption growth. This linkage can be stretched a little by the growth of technology applications and the services sector but it cannot be broken in any fundamental way. Overall, non-renewable energy resources can only get scarcer. This scarcity will translate into higher prices especially as products like coal and natural gas are not just fuels but also feedstocks for many other industrial processes. There is no indication (IMO) that renewable energy production is yet growing fast enough to counterbalance the impending scarcity of non-renewable fuels.

    The world economy faces an extraordinarily difficult period ahead. We are now basically in the position, with respect to fossil fuel use, of being damned if we do use it to catastrophic climate change and damned if we don’t use it to a catastrophic economic collapse.

    Either way, there is no indication that coal use will decline consistently until there is an actual physical shortage of the stuff and/or if the world economy falls off a cliff.

  7. TerjeP :
    The boom in natural gas, brought on by technological innovation (ie fracking), and most pronounced in the USA

    This triumphalist myth of innovation on demand is getting old. Fracking has been used for decades. The “boom” in natural gas in the US is a by-product of the high price of oil. (Since when has it been called a boom when the price is one-fifth of world prices?) The shale gas wells in the US make what money they do make from natural gas liquids (propane, butane, etc.), the price of which is tied to that of oil, not gas.

    Refuting a related myth, the decline in US coal consumption was not caused by fracking. Reality is more nuanced. In brief, the major causes are:-
    the coming into force of long-planned mercury emission regulations, which caused the closure of marginally profitable, inefficient coal peaker plants;
    improving energy efficiency of US manufacturing, and the consumer “Energy Star” program at last bearing a few wizened fruit;demographic changes;the growth of wind power, and its need for fast-starting, low-capital-cost backup, in the form of NG plants;the US depression.

  8. Some data on coal and renewables…

    conclusions seem to be demand for coal will keep on driven by Asia demand, with renewables looking most interesting in a few more years

  9. Guys,

    It pays to be aware that “coal aren’t coal”. The coal which China is paying the big bucks for is metallurgical coal. It is it suitable for coking and subsequent use in blast furnaces. (Basically, it reduced to carbon with sufficient strength to hold the weight of the iron above it and contains no impurities that will compromise the integrity of the pig iron produced.)
    Then there is hard (Bowen Basin mainly) and soft (Hunter Valley mainly) grades of this coking coal. (Hard Coke coal can be blended with more of the cheaper grades of coal to still generate an acceptable coke.)

    You can use coking coal as thermal coal but not vie versa. So the price of thermal coal sets a lower bound on the coke coal prices is steel production demand drops off but is unrelated to the upper bound if coke is in short supply. The substitution of gas for coal and resultant reduction in the thermal coal prices just reduces the safety net for coking coal produces if steel production stops.

    Most of the coal mining boom in Australia is coke coal related. China has plenty of it own low grade thermal coal. But prices are dropping. West Farmers were getting $300 dollar a tonne for high grade Curragh coal last year. This year it is $200. (Still a pretty good price!) There is a fair bit of low grade coal produced as a bi product in coke coal mines but this is not the main game.

    But, all the easy to access hard coking coal in the Bowen Basin have been mined and the reserves now are deeper and more expensive to mine. I believe the same is true for the Hunter.

    Also, I notice that Rio just announce the first shipment of hard coking coal from its shiny brand new mine in Mozambique so competition is starting to come to market. (It takes about 5 years to develop an new mine from scratch.)

    I think this all points to fact that the glory days of the Australian coking Coal Mining industry are rapidly passing. Hopefully, world steel production will not drop to a level were this coal will need to used as thermal coal. The Australian coal mining industry will be in big trouble if this happens.

  10. A follow up to the coking coal outlook is that Rio developed the HiSmelt process in Kwinana WA that can use bituminous (tarry) or sulphurous coal. When last heard of that plant was to be dismantled and re-assembled in India

    That suggests to me the big end of town wants to move carbon intensive activity offshore. It keeps both shareholders and greenies happy since the emissions are out of sight but the dollars keep coming in. Even IPCC head Pachauri hinted that India was entitled to catch up on per capita emissions with other countries making the big cuts. However with India at 1.2 bn and China at 1.3 bn population there may simply not be enough coal to go round. It also says these countries have outgrown their resource base. James Packer assures us the Asian middle class will keep growing I’m not so sure.

  11. According to industry sources despite strong growth in China Japan continues to be our single biggest export market, by a significant margin.

    In the Hunter production is constrained by insufficient supply chain infrastructure with massive expansion in rail to relieve congestion. Port authorities have planned for continuous expansion for the foreseeable future.

  12. @Hermit
    Thanks for that interesting news. In 2003 or so I did some research on mining industry subsidies and found that the State (WA) and Commonwealth kicked in about $100m to fund the HiSmelt facility; with a promise of $75m more if they built a steel mill nearby (or it may be that the mill was to be in Queensland, my memory could be wrong on that).

  13. I think the reason our steel industry (OneSteel and Bluescope) is not screaming loudly about carbon tax is the 94.5% free permits plus another $300m in cash giveaways. I read this message as ‘take this painkiller then go away and die quietly’. It’s also hard not to suspect there are other hidden giveaways in the Fed’s largesse. For example yesterday Comalco said they got a pleasing long term electricity supply contract. In a world of expensive energy you have to suspect the Feds may have quietly slipped in a few dollars without saying so in a press release.

    If the metals industry has been given a subtle govt nod to move offshore that could leave us without heavy manufacturing capability. The assumption may be that service industries will fill the gap eg steel workers become solar panel installers. If so it could easily become unbalanced. Secondly the whole approach of overgenerous compensation undermines the idea of no pain no gain. We might find a year from now emissions are in basically line with GDP change with only tenuous links to carbon tax.

  14. “Secondly the whole approach of overgenerous compensation undermines the idea of no pain no gain”

    But not the economic analysis showing that the “no pain, no gain” idea is wrong. I’ve posted lots on this already, so won’t repeat for those who don’t want to learn. Not that the business compensation isn’t overgenerous, but that’s a distributional problem.

  15. I suppose the no pain no gain argument is useful as a diversion from the more important issue of why its needed in the first place.
    Far more interesting to get on with the discussion of whether its more important to whip the plebs into line or move with technology and employ cattle-prods- a serious debate between the neolib ancients and the new vanguard, as to such esoterica.
    But it is all in balance, what some lose, others gain, all toward the best of all possible worlds.

  16. I should clarify that I’m referring to business compensation. Not only is it extraordinarily generous with Australia’s carbon tax (Hazelwood got $266m for God’s sake) but the European ETS allows up to 50% carbon penalty avoidance using CDM offsets which some believe are not real emissions reductions. Both schemes could be said to have soft umpires. This opinion might be vindicated if a year from now the carbon tax has failed to impress.

    PS add Alcoa to the Comalco miracle save, in both cases aluminium not steel.

  17. @Hermit
    But compensation still won’t affect incentives, so long as the amount delivered is not dependent on the tax paid.

    As far as I can see, compensation to heavy industry is bad for two reasons:

    a) It’s an unnecessary transfer of wealth from the public sector to certain private interests.

    b) It validates anti-green bets made in the past, for instance by people who bought coal power stations after the greenhouse liabilities of coal were made clear.

  18. Success by aluminium industry for some pain money. Arguments include
    1) we are sitting on most of the worlds bauxite so we should make aluminium
    2) manufacturing is reliant on local metal production
    3) this is a temporary blip and things will get back to normal soon

    Being cynical I immediately thought
    4) some regional areas are dependent on single industries
    5) loss of major employer would devastate whole areas
    6) govt can’t afford to lose any seats.

  19. Intelligent human communities have existed on earth for at least 17,000 years as the paintings in the caves of Lascaux in France ( reveal, yet those running the world would have us dig up our finite inheritance of fossil fuel, including coal, to become landfill, pollution and climate warming carbon dioxide in as little as 100 years.

    Whatever has motivated the Chinese to cut back on Australian coal imports, I hope that decision not only stands but is extended. Only then can we hope to make our fossil fuel last for a period of time that even remotely approaches the length of human history so far.

    In the meantime, we should develop a real economy in this country which makes effective use of renewable resources and does not use up water, soil and natural vegetation. Such an economy would mostly be food production.

    A smaller component of such an economy would be the manufacture of artifacts built to last. Manufactured goods should be required by law to be made of standardised spare parts and fittings and designed not to break down, instead of becoming landfill after only a few years at most.

    The time left over cold then be devoted to recreation, rest, culture and intellectual pursuits.

  20. Coal and oil are both renewable resources; they just take a little while to renew.

  21. What a sustained drop in iron ore & coal prices and volume might mean for Australia is a shrinking economy (activity, wealth) especially on a per capita basis. When the federal budget came out I looked for a simple statement of commodity price/volume assumptions but did not find it. The next rebudgeting might be more explicit.

    I understand that Qld coal Royalties are 7% for that part of the price below $100, and 10% above, alarge increase could be coming.

    Upsides to the downside might include slower exhaustion of resources, and oressure aggainst population increases.

  22. Australia is like a flatulent poodle when it comes to furtive emissions. BREE opines that by 2025 our exports of coal and gas will double or treble
    Taking a predicted mid range value of say 300 Mt for both thermal and coking coal and 100 Mt for LNG I multiply by 2.4, 2.7 and 2.8 to get CO2 from our exported fossil fuels of over 1.8 billion tonnes.

    Resources Minister Ferguson appears to be tickled pink at the prospect. It does seem a tiny bit inconsistent with the carbon tax supposedly helping reduce global emissions.

  23. @Kevin Johnson , I’m no fan of “co-investment” and other forms of business welfare. But if governmnts must throw our money at subsidy bludgers I’d far rather they threw it at R&D that has some chance of developing new markets rather than just prop up failure in old markets. Seems to me that Hismelt fits that – if viable it will boost the price of what is now just steaming coal, of which we still have plenty (you’re right we’re starting to run out of coking coal).

    That’s why, unlike many here, I thought the Howard government’s subsidies to carbon capture were a better strategy than pouring money into solar, wind etc R&D. If CCS was succesful then Australia would have got more benefit than other developed countries. If wind, solar etc replaced coal then Australia would still benefit, but by much less than our coal customers would. Our expected payoff from the various forms of renewables differs from theirs.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s