The coal industry is in crisis. It has failed to recognize the structural shift in power generation driven by regulation rather than price and has missed the window of opportunity to invest in clean coal technologies. Now it faces a slow King Canute style demise, as elaborated by Ross McCracken, managing editor of Platts Energy Economist.
Back in May 2014, the Queensland Resources Council reported that more than 50% of Australian thermal coal was being produced at a loss. Consultants Wood Mackenzie estimated this March that nearly 17% of US coal production is uneconomic at current pricing levels, representing 162 million short tons of production capacity. In China, China Shenhua Energy Co., the country’s largest coal producer, in what is the world’s largest coal market, expects a 10% drop in domestic coal sales this year, equivalent to 47 million tons.
This is an industry in crisis. Not because there is too much coal available, which there is, but because in its key markets the prospects for demand growth are being slowly killed. The reason isn’t price – coal is dirt cheap – it’s the ‘dirt’ bit that is the problem.
China is hauling back what was the world’s largest ever expansion in coal-fired generating capacity in the interests of both local air quality and climate change. In the US and Europe, emissions regulations are forcing the closure of old coal plants and making new plants increasingly difficult to build. If construction of coal-fired generation plant stalls, then so too, eventually, does demand for thermal coal.
The change is perhaps most dramatic in China. Shenhua published its 2014 results in March, which showed a drop in commercial coal production from 318.1 million tons in 2013 to 306.6 million tons in 2014. Coal sales, which include third-party sales, fell even faster, dropping 514.8 million tons to 451.1 million tons year-on-year.
Its guidance for 2015 foresees commercial coal production falling further to 273.60 million tons, while coal sales are expected to drop 46.85 million tons to 404.25 million tons.
Shenhua believes the coal industry in China is entering a new paradigm, which is describes thus: “In 2015, the new normal state of the coal industry will become further defined. The development mode purely relying on the expansion of output and capacity is gradually dying out along with the conventional market competition model.” To address this structural change, Shenhua hopes to build itself into a “world first-class supplier of clean energy.”
But is the rest of the global coal industry adapting to this new normal? Instead of investing in clean coal technologies when the going was good and coal prices high, the coal industry simply invested in greater production capacity. Politically, instead of swimming with the regulatory tide, it tried to fight it. Now it faces a slow King Canute style defeat.
Most worryingly for the industry is that the window of opportunity for clean coal has been missed. All clean coal technologies are dependent on carbon capture and storage and nowhere in the world has anyone, not least the coal industry itself, been prepared to spend enough money to make CCS viable.
In the meantime, other options, which don’t produce the CO2 in the first place, have fallen in cost, making CCS look like an increasingly unnecessary gamble. The oil, and even the natural gas industry, should perhaps ask themselves whether they are swimming with or against the tide.