July 26, 2021
The future for coal is uncertain but forecasts suggest the trajectory for Australian coal could be different to other producers around the world, writes National Research Director Peter Colley.
The overall global market for coal may be going down, with most of the debate about how fast, but that does not mean the story is exactly the same for Australian coal.
Recent forecasts by a major private forecaster have Australian thermal coal plateauing while the rest of the world declines, and Australian coking coal increasing for some years before the effects of the steel industry seeking to reduce global warming emissions have some impact.
In the last half year I have pointed out that the International Energy Agency has Australian coal production falling (a little) over the next five years, while the Australian Government forecaster has Australian coal recovering from the pandemic trough of 2020 but plateauing out to five years.
And of course, there is the story of coking coal versus thermal coal having different futures, and Australia producing a much higher proportion of coking coal than most other nations.
Wood Mackenzie, one of the largest private sector commodity forecasters in the world, has recently said that it expects world thermal coal demand to fall faster than it forecast just last year. But internationally traded coal declines less than coal produced and consumed domestically – though still about 20% by 2050.
But the impact is felt more by low energy coals, so Australia’s competitors lose market share while Australia gains. The net impact on Australia is that its actual thermal coal production remains stable through to 2050.
Prices actually remain fairly OK– over US$80 per tonne – because the divestment push by western investors and lenders, and legal action against mine approvals, restrains new production.
With respect to coking coal, Wood Mackenzie has the steel industry being unable to change much until about 2030 (while still growing slowly), and then it starts to reduce emissions firstly by recycling much more steel scrap, and then by efficiency measures and then green steel production using hydrogen instead of coking coal.
Production from existing Australian coking coal mines rises modestly through to about 2030 before declining. This is weighted towards higher-quality hard coking coal. Prices actually rise to over US$150 per tonne by 2050. This is because coking coal supply falls faster than demand does, again due to western investor divestment and legal restrictions on mine approvals.
These “nuances” – a different trajectory for Australian coal to the rest of the world – rest on major uncertainties about what governments really do about climate change. The forecasts above assume that governments fail to reduce global warming to the target of less than 2 degrees they agreed in Paris in 2015.
We know that countries that account for over 60% of Australia’s coal exports – Japan, China and South Korea – have all made commitments to reduce greenhouse gas emission to “net zero” by 2050 or 2060. Japan has recently announced a plan to cut natural gas use by 50% and coal use by 40% by 2030. But Japan has a history of not meeting targets of any kind in its energy mix. (For example, for most of the last four decades it has planned to use more nuclear power, but today it uses less due to local hostility and safety concerns.)
The Korean Prime Minister has made very strong statements about reaching net zero, but seven of the nine coal power plants that he vowed to reconsider four years ago are going ahead. The Indian government famously said back in about 2016 that it would reduce thermal coal imports to zero by 2021. But they are higher than ever.
So coal demand will fall, but not as fast as claimed, and not fast enough to prevent global warming above 2 degrees, with all the consequences that involves.
Trying to draw firm conclusions from all this is a losing battle. We know that demand for coal is declining and that decline is likely to accelerate. But the particular role for Australian coal may be different. A lot depends on what governments do, and what investors do. Of course, some investors bailing out does not mean they won’t be replaced by others. (There is plenty of evidence of that happening.) The newer investors are likely to have shorter time horizons and seek higher profit rates to match, meaning more pressure on all costs including labour costs.
After the mini-boom this year, coal production in Australia may decline as soon as next year, or not until about 2030. We would be wise to plan for it.