Asia won’t abandon coal

Anthony Fensom

Reports of coal’s death appear to have been greatly exaggerated, at least judging by major Asian importers’ continued commitment to the black gold.

Despite reviving nuclear energy, Japan has given the green light to more coal-fired power plants, after importing a record amount of thermal coal in 2015. Meanwhile, coal demand is set to hit a new record high in neighbouring South Korea, while Taiwan’s new government could back increased coal imports to replace ageing nuclear reactors.

Added to the emerging demand from ASEAN and India, and suddenly coal bulls have reason for optimism after a year to forget for the global industry, including a drop in demand by China.

Moves by miners to reduce metallurgical coal oversupply could even see prices start rising again, with analysts predicting a rise in the benchmark price in 2Q16 as China curbs output.

The world’s biggest coal consumer, producer and importer has flagged plans to cut 1.8 million workers from its coal and steel workforce, with Chinese firms reportedly pushing Beijing to set a price floor to protect against mass bankruptcies and layoffs.

China accounted for 50% of global coal consumption in 2014, but now plans to cut around 500 million t of production over the next 3 – 5 yr. This would be achieved by closing more than 5000 coal mines, retraining and relocating workers and not approving any new mines for the next three years.

BB&T Capital Markets coal analyst Mark Levin points to a shrinking number of coal ships at Newcastle Ports and Consol Energy’s sale of a US coal mine for US$420 million as signs of a coal revival.

According to the International Energy Agency’s (IEA) Medium-Term Coal Market Report 2015, while global coal consumption stopped growing in 2014 for the first time since the 1990s, the main driver was a drop in Chinese demand, with India overtaking the US as the second-largest coal consumer.

However, declining demand and oversupply forced prices of both thermal and metallurgical coal lower in 2015, with import prices for thermal coal in Europe and Asia dropping below US$60/t, while prices for Australian metallurgical coal slipped below US$100/t.

According to the Australian government’s Department of Industry, both metallurgical and thermal coal markets are expected to remain well supplied through 2016, placing further downward pressure on prices. It expects metallurgical coal prices to drop by 16% in 2016 to average US$86/t, with thermal prices to decline by 12% to around US$60/t for the Japanese 2016 fiscal year.

Nevertheless, the IEA said it expected worldwide coal consumption to continue growing at a rate of 0.8% a year through to 2020, with the strongest growth seen in ASEAN (up 7.8% a year) and India (up 4.1% per annum). India is seen as replacing China as the world’s largest coal importer, with Australia deposing Indonesia as the largest exporter.

With key Asian economies turning to coal for affordable and abundant energy, some 400 GW of power generation capacity – roughly equal to the combined installed capacity of Japan and South Korea – is expected to be added across the region through to 2040, of which 40% will be coal-fired, the World Coal Association noted.

Japan: it’s hip to be square

Japan’s revival of its shuttered nuclear power industry is set to continue in 2016, but coal’s status appears far from threatened despite the nation’s commitment to curbing emissions.

In January, Kansai Electric Power Co. resumed operations at the No. 3 unit of its Takahama plant, the third such plant to restart after the Sendai units of Kyushu Electric Power Co. recommenced operations in August 2015. This followed a complete shutdown of the nation’s nuclear power industry, comprising 43 plants, in the wake of the March 2011 disasters.

Another three nuclear plants may come online in 2016, with as many as 33 reactors needed to be switched back on to meet the government’s target for nuclear to contribute 22% of the nation’s energy needs by 2030, according to analysts.

Japan’s nuclear shutdown helped thermal coal imports grow to a record 114 million t in 2015, up almost 5%, even while liquefied natural gas (LNG) imports dropped by nearly 4% to 85 million t for their first decline since the disasters.

“The figures are consistent with the government’s 2030 basic energy plan, which aims to reduce LNG usage and maintain coal,” Tom O’Sullivan of energy consultancy Mathyos Japan told Reuters. “This would seem to contradict the aims of the COP21 conference in December that sought to reduce global carbon emissions.”

Under the 2030 plan, coal is expected to account for 26% of total energy, down from 30% in 2015, with LNG dropping to 27% from 43% as part of a decline in fossil fuels to 56% from 88%. The push to restart nuclear power follows a doubling in fuel costs, causing the trade deficit to blow out and electricity rates to surge by nearly 40%.

However, Japan’s commitment to lowering greenhouse gas emissions by 26% from 2013 levels by 2030 has put pressure on the power industry, including coal, to curb emissions. The government is expected to set tighter standards for coal-fired plants and ‘encourage’ inefficient facilities to be scrapped under even tougher targets for emissions to be reduced by 80% by 2050 from current levels.

Yet after blocking a reported five new coal projects since June 2015, the Environment Ministry decided in February 2016 to approve the construction of new coal-fired power plants in exchange for tougher standards on emissions. Two coal plants in Ibaraki Prefecture and two in Fukushima Prefecture were expected to be approved under the new guidelines, according to Japan’s Nikkei business daily.

Japan could build as many as 41 new coal-fired power plants over the next decade, with some 23 GW of new coal capacity under development as of 2015 compared to total capacity of 41 GW in 2014.

The Japanese industry has sought to curb emissions by investing in new technologies, including the Osaki CoolGen project in Hiroshima, which uses integrated gasification fuel cell combined cycle to curb emissions by as much as 30%.

Japan has also continued to invest in carbon capture and storage (CCS) technology, including a pilot project to inject carbon dioxide into deep saline aquifers off the coast of the northern island of Hokkaido. The Japanese government has invested a reported US$300 million in the project, with a goal of making CCS a viable technology by 2020.

“It is difficult at this point to estimate how much CO2 emissions will be cut in Japan and how much of that should be achieved through CCS in the future,” Takeshi Nagasawa, Director of the Global Environment Partnership Office at Japan’s Trade Ministry, told Bloomberg News. “But it is still important to build technologies so that we will be ready when it is needed.”

Nevertheless, power use declined in 2015 to its lowest level since 1998 on the back of higher prices, a shrinking manufacturing sector and declining population. The complete liberalisation of the power sector in April 2016 is expected to add to the pressure on utilities, with total revenue of the nation’s three largest power generators expected to shrink by 5.5% in fiscal 2016.

According to the Australian government, Japan’s metallurgical coal imports are set to remain steady at around 50 million t in 2016 compared to 51 million t in the previous two years. Thermal coal imports are expected to drop from an estimated 144 million t in 2015 to 135 million t as nuclear plants restart and “relieve some of the pressure on coal-fired plants operating at capacity.”

Despite weaker resource earnings, Japan’s major trading houses are also reportedly on the prowl for new investments. Mitsubishi Corp., estimated as the world’s fourth-largest mining business by value of its mining and energy assets, has stated its ambition to double production volumes in metallurgical coal and copper by 2020, requiring an estimated US$12 billion in new investments.

Being the ‘odd one out’ among the G7 in not curbing coal power does not appear to trouble energy-hungry Japan, which plans on further exports of its ultra-supercritical, low-emission plants, even while it builds more capacity at home.

South Korea: no stopping King Coal

Record coal demand is forecast for South Korea in 2016, following an increase in the number of coal-fired power plants starting operations and despite Seoul’s COP21 pledge to curb emissions.

Coal accounted for around 40% of the nation’s electricity supply in 2015, despite the government’s move to hike the tax on imported coal for power generation. Based on data from Korea Electric Power Corp. (KEPCO), the nation’s current coal-fired power plants are operating at around 80% of capacity, but even more plants are planned.

According to the Korea Energy Economics Institute (KEEI), South Korean coal demand will increase by over 6% to more than 140 million t in 2016, following the startup of nine new plants with a combined capacity of 7.7 GW.

Asia’s fourth-largest economy expects to build 19 new coal-fired power plants by 2022, despite scrapping plans for four new plants as part of its COP21 pledge to curb emissions by 37% by 2030.

“It takes about four to five years to build new power plants and start operations. We just can’t cancel the operation of new plants that are already built and ready,” an anonymous energy ministry official told Reuters.

In January 2016, the nation imported nearly 10 million t of coal, up 5% from a year earlier. Imports of thermal coal used for power generation were up by nearly 6% y/y, mainly from Australia, Indonesia and Russia.

An OECD report ranked South Korea last among its members in use of renewables, with such power sources accounting for only 1.1% of total energy, compared to its large share from crude oil and coal, which accounted for around two-thirds of primary energy supply.

The Australian government’s forecaster expects South Korea’s demand for metallurgical coal imports to stay flat in 2016 at some 34 million t, although thermal coal imports are seen rising by around 4% to 106 million t as the new plants come online.

Taiwan: new government's energy dilemma

Taiwan is also set to buck the trend set by the West by actually boosting coal imports in 2016. According to the Australian government’s forecaster, the world’s fifth-largest coal importer may increase thermal coal imports by over 2% in 2016 to 62 million t.

In 2014, per capita coal consumption amounted to 2.51 t of coal equivalent, behind only Australia (2.66 t) and Kazakhstan (3.15 t). Coal accounted for around 40% of the island’s power generation that year, compared to 30% for natural gas and 18% for nuclear, but the nation’s three operating nuclear plants are scheduled for decommissioning from 2018.

Construction of a fourth nuclear power plant was halted in 2014 and appears unlikely to restart, given the longstanding opposition to nuclear power from the newly elected Democratic Progressive Party (DPP) government.

Nevertheless, Taipei has pledged to curb greenhouse gas emissions by 50% compared to 2005 levels by 2050, along with introducing a cap-and-trade carbon trading scheme.

Taiwanese President Tsai Ing-wen is seen favouring gas to meet the nation’s emission reduction targets, while gradually phasing out nuclear power from 2018. An expanded role for coal is seen as unlikely, given the DPP’s aim of reducing the nation’s economic reliance on China, its leading supplier.

Conclusion

For Asian coal watchers, the Year of the Monkey may be mischievous, but with demand rising and supply apparently starting to decline there are still plenty of reasons to smile.

Note: This article first appeared in the April 2016 issue of World Coal.

About the author: Based in Brisbane, Anthony Fensom covers the Australian and Asian coal industries for World Coal.

Read the article online at: https://www.worldcoal.com/special-reports/11042016/asia-wont-abandon-coal-557/