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Is the Coal Investment Story Over? By Shobhit Seth | January 13, 2016 — 4:31 PM EST
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Until 2015, China was the largest consumer of coal with nearly half of global produce being used by the world's most populous nation. Though China is expected to retain the top spot, its coal usage is expected to reduce significantly going forward. With no equivalent alternative to the large Chinese demand, a widespread switch to alternate sources of energy at the expense of coal, and an oversupply of coal in the global markets leading to falling prices, is the story over for global coal industry? This article checks the current state of coal business, the developments leading to forecasts, and the road ahead for coal investments. (For more, see: A Primer On Coal.)
The Current State Of the Coal Business
As of 2015, coal is used to generate around 40% of global electricity. While coal usage remains a primary source of pollution and accounts for almost 50% of global carbon-dioxide emissions, coal maintains its significance as a building block for energy security for many global economies. It remains an important ingredient for infrastructure and economic development.
However, amid declining global demand with increasing supply, coal prices have hit the bottom levels of the last decade. From a peak of above $200/tonne in mid-2008, the prices have fallen below $50/tonne in December 2015. (For more, see: How To Trade Falling Coal Prices.)
The Coal Forecasts
There is a general concurrence among various forecast reports regarding the outlook for the coal industry. All indicate a bleak position going forward.
Business Insider reports that the global demand for coal is “Is now growing at the slowest pace seen since 1999.” While the following chart accompanying the report shows continuously increasing coal consumption in the last decade (2005-2014), it also shows the demand growth declining to the lowest levels as seen in the chart below.
The Medium-Term Coal Market Report 2015 published by the International Energy Agency (IEA) has reduced the estimates for “global coal demand growth by more than 500 million tons of coal equivalent (Mtce)” for the next five years.
A Bloomberg report also echoes similar developments, with global coal usage falling by 4.6% in September 2015.
Significance Of China In Global Coal Market
China accounts for almost 50% of global coal usage. Along with being the largest consumer, it is also the top producer, as well as the largest importer of coal in the world.
The rest 50% of global coal is used by India, the USA, European Union, Southeastern countries, and the rest of the world, in declining order of coal consumption. (For more, see: Moody Reports Grim Outlook for US Coal.)
IEA Coal Market Report provides a graphical representation of historical and forecasted coal usage from the year 2000 to 2020:
How China Impacts Coal Demand
Between 2000 and 2014, China's coal usage increased by 80%, which led to a significant rise in coal demand. It was also the era when the Chinese economy boomed, with increased manufacturing output, global exports, and industrial production. The consistent rise in coal demand in China is attributed to the nation's recent economic progress.
With nearly half the world market share, any change in Chinese consumption of coal is bound to impact the coal prices and the industry segment as a whole.
The situation is changing now on different fronts in China, which will have a cascading effect on coal usage.
Major cities in China, including the capital city of Beijing, have been forced to shut down repeatedly for several days, amid increasing pollution. With coal being identified as a major pollutant, there is a global push to reduce its usage. With increasing concerns about usage of coal leading to environmental degrade, it may be impossible to see Chinese consumption returning to the earlier peak levels.
The Chinese economy is moving away from the traditional energy-consuming manufacturing industries and shifting towards service-based and consumption-oriented sectors. The reduced energy needs are expected to be fulfilled by an increasing share of power generated from hydro, wind, solar and nuclear sources, which will significantly bring down the coal usage in China. (For more, see: China's GDP Examined: A Service-Sector Surge.)
Recent figures about coal usage in China during 2015 indicate a grim picture. Bloomberg cites coal usage in the Chinese power sector dipping by more than 4%, Chinese coal imports declining by 31%, and a reduction in capacity utilization of the Chinese coal based plants.
All of these factors combined will lead to declining usage of coal in China and globally. In the midterm period of the next five years, it may be impossible to see coal consumption and demand reach previous peak levels seen during the last decade. Instead, it will be a downward graph for global coal consumption, with the fall prominently led by China.
The Road Ahead For Coal
Declining coal usage in China is a pattern echoed globally. The U.S. is expected to reduce the share of coal in power generation from 50% a decade ago to 36% in 2016. The European Union nations have had a flat coal consumption in the last five years, with a decline of 6.5% in 2015.
New leaders among coal consuming nations are expected to emerge, with India and other smaller Southeastern nations taking the lead away from China and the USA. Energy-hungry nations like India are expected to increase their coal imports as well as coal consumption, but those are expected to get offset by declines in China, the USA and the EU nations.
The Southeast Asian nations can utilize this low-cost opportunity to stake up their coal reserves and improve their energy security. However, their capacities get limited due to old and inefficient technologies used in coal power generation. There is no significant development expected to introduce new and efficient thermal plants in near term in these countries.
Amid serious environmental concerns, the global oversupply and declining demand are expected to cast long term pressure on coal prices for the coming few years.
The Bottom Line
Coal has had a stellar performance in the last decade, fueled by the Chinese boom. However, for the short- to mid-term, coal may remain out of favor with investors. (For more, see What Is Coal's Future?)
Read more: Is the Coal Investment Story Over? | Investopedia https://www.investopedia.com/articles/investing/011316/coal-investment-story-over.asp#ixzz5SPpV5ATm
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