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Tony Abbott gets crash course in carbon bubbles

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It didn’t take long for prime minister-elect Tony Abbott to get a lesson in the harsh realities of international markets. Just days after his election, his repeated promise to repeal the carbon price, the mining tax, roll back green tape and open the country up to business, one of the biggest mining projects in the country – the $7 billion Wandoan coal mine in Queensland – was scrapped.

This was something that was only supposed to happen under a Labor/Green government. But, as Glencore Xstrata CEO Ivan Glasenburg made clear on Tuesday, the world has changed. There is simply not enough demand from other countries, and prices are way too low to justify new projects.

This should have come as no surprise to Abbott’s closest advisors, presuming they are doing their job properly, and not just listening to the overtures of Gina Rinehart. Nearly a third of the world’s thermal coal supplies are losing money because of significant shifts in consumption and economic priorities in China, the world’s biggest coal user, and elsewhere.

This was underlined just days before the election when US, English and Chinese based analysts at Citi, the world’s biggest investment bank, released a report that said China, the world’s biggest coal consumer and emitter of greenhouse gas emissions, is likely to dramatically cut its demand for coal.

In the report, The Unimaginable: Peak Coal in China, the Citi analysts say peak coal in China is not just probable, it could be imminent. Under one of its scenarios, coal consumption could peak in 2014. It is certainly likely to happen by 2020.

“Over the last decade, one of the most unassailable assumptions in global energy markets has been the ever-increasing trajectory of Chinese thermal coal demand,” the analysts write.

“The results of our analysis indicate that the era of wanton Chinese coal demand growth is approaching an end.” And, it warns, coal miners should not count on other markets such as India picking up demand either because of economic issues and a lack of structural reform.

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Will Tony Abbott stop the boats? Or will China stop them for him?

The implications for the newly elected conservative government in Australia, which had pinned its policies on the future being exactly like the past, are enormous. Its policies are almost entirely geared towards re-igniting a mining boom, particularly in the coal industry. The carbon price, incentives for renewables, and “green tape” are being removed specifically to make that possible.

The problem is that the financial markets no longer believe this to be true. And as Citi points out, this has “serious ripple effects” for globally graded commodities, and for countries which rely on coal production.

The Citi analysis is not the first to come to such conclusions, although it is the most timely. Deutsche Bank said earlier this year that Chinese coal demand could peak in 2017. It said then that Rinehart’s Alpha and Clive Palmer’s China First projects may suffer a similar fate to Wandoan. And Goldman Sachs said in a recent report that the window for new investment in coal was closing rapidly.

The Citi analysis suggests it may have already done so. It should not be forgotten that the Chinese government itself said it is likely to put a cap on coal consumption of 4 billion tonnes in an effort to contain the pollution that is ravaging its cities and angering its rising middle class. HSBC fully expects such targets to become law.

Under some scenarios painted by Citi, the cap and reduction in coal demand from China is equal to that envisaged by the International Energy Agency under its most optimistic “450 scenario” – where the world finally takes decisive action to meet its stated climate targets.

The Citi analysis is important, seeing as the Coalition’s entire economic and climate change strategy is to presume that: (a) climate change is probably not happening; (b) the world is not going to act, and; (c) bugger it, we’ll dig it up anyway because we can’t think what else to do.

Climate change spokesman Greg Hunt made a big deal in his speeches ahead of the election about China’s coal consumption jumping to 7 billion tonnes. That is something that the Rineharts and Palmers of the world want to hear, but it doesn’t bear the reality of the situation. As mentioned, China has said it is contemplating a 4 billion tonne cap, and these next three graphs from Citi show why that is a likely scenario.

Citi says there are four key drivers impacting coal: (1) reduction of air pollution; (2) structural downward shifts in China’s GDP growth and energy intensity; (3) robust growth of China’s renewables and nuclear capacity, along with increased availability of natural gas from pipeline/LNG imports and domestic production; and (4) efficiency improvements in coal power plants. These scenarios paint different outlooks for GDP growth, and efficiency and non-coal deployment.

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This next graph gives the likely coal-fired generation in China over those various scenarios. Note that in the deep transition scenario contemplated by Citi, coal-fired generation peaks just two years from now in 2015.

By 2020 it is tracking the IEA’s 450 scenario, which is what the IEA says needs to be done to keep a cap on emissions so that they don’t exceed a maximum 450 parts per million, and so give the best opportunity to limited global average temperature rises to 2°C.

So this scenario comes about because China experiences moderate growth and “stays the course” on its commitment to renewables, gas, nuclear and energy efficiency. International climate change negotiations are not a driver, although Citi notes that weak coal demand in China could change the dynamics of international climate negotiations and put more pressure on the US to act decisively.

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This next graph below is the range of scenarios for aggregate China coal demand – both for power generation and non-power generation. Under the “deep transition” scenario, coal demand peaks in 2014. Hunt’s fanciful projection of 7.5 billion tonnes by 2030 is so far from the market it is ridiculous. If any Coalition policies are based on these assumptions, they should be changed now. Stubborn insistence on dumb policy will not be acceptable.

As Citi suggest, “disruptive changes in technology costs and fuel markets are now set to ensure that the next ten years look little like the last twenty.” It goes on: “The end of the supercycle should weigh on both the mining and equipment sectors. But sectors that excel at renewable integration, distributed generation, transmission could benefit the most.”

Screen Shot 2013-09-10 at 4.05.38 PMAnd just one final graph for those interested in how this all pans out for power generation sources in the transition scenario. As Citi suggest, even scenarios with comparatively stronger power demand growth and weaker renewables growth still produce substantially slower coal demand growth than many market participants currently anticipate.

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  • Peter B

    Giles, This is confusing, on one hand you have said we need a Carbon Tax but now you are implying it is not needed because Thermal Coal exports are already going to tank. Cant we just continue to bag the unelectable Tony Abbott/Conservative Government without mixing our messages?

    • Motorshack

      I don’t think I see any contradiction. The article says that the carbon bubble will not expand to the level of seven billion tons a year in China, but it also says that the residual consumption will still be at the level of four billion tons. So, to encourage the phasing out of that residual consumption it might be very useful to have a nice, stiff carbon tax.

      • Peter B

        Not sure how/what a Carbon Tax in Oz has to do with China’s problems. The present 4bn tonnes of coal is what is giving China it’s current pollution problems, especially that which is sourced from low grade local supplies and that burnt in old tech stations. To stop the people revolting (as in virtually all previous dynasties) the Communist Party will need a combination of renewables, nuclear, supercritical power plants and, heaven forbid, “cleaner” coal all in combination over the next decade. As said, still not sure how feel good policies in Oz are going to help let alone interest the Chinese.

        • Motorshack

          Well, I was thinking of taxing carbon at the source, which would raise the price anywhere it was sold. That is only one possibility, of course. Also, you are right that the lower the demand for coal in China, the more likely it can be sourced locally, in which case an Australian carbon tax would still reduce the temptation to import coal, and force them to make do with local sources, even when that was not very convenient.

          Otherwise, China is not the only place they burn coal. The article was talking about Chinese consumption, so it was a natural example to use, but the same basic pattern is happening in lots of places now. Again, carbon taxes might be useful to speed the full retirement of coal. Wherever.

          Finally, why is a carbon tax a “feel good” policy, which I assume means emotionally appealing but not very effective? Raise any tax to a sufficiently painful level and it is almost certain to change behavior. Why would a carbon tax be any different?

          • Peter B

            Are you suggesting we put a Carbon Tax on our Exports? Should we raise the price of our exports so that they turn to Northern Hemisphere exporters that sell Coal that has a higher SO2 content than Oz Coal(?). What a great policy that would be. The Chinese don’t have scrubbers/pollution controls on their stacks and don’t have a cap and trade on Sulphur like the USA. Diverting the the Chinese to “worse” coal is not really a good solution!

          • Motorshack

            Actually, if I could wave a magic wand and take all coal off the market, I would do it today, but lacking that I’ll take what I can get, however it is done. As far as I am concerned the people selling coal are getting rich today by killing my grandchildren forty or fifty years from now, which makes them murderers. So, I would treat them as such. They have no mercy for me or mine, so they deserve none.

            As for the Chinese, they are already doing their damnedest to get rid of coal, even though in the short run they are completing a few more coal-fired power plants. That is what is so effing funny about this story.

            The Chinese population is literally on the verge of revolution over the atrocious air quality, and the Coalition is popping wood over the idea of selling them twice as much coal. Even the coal companies are starting to cancel their plans, and the politicians are still not getting the message. How stupid can they be?

          • Giles

            You seem to be missing the point of the story, China will not be importing coal. Full stop. The newer coal fired power stations in China are more efficient than most of those in the US. They are also introducing pollution control on Sox and Nox. Beijing (the city) wants coal to account for less than 10 per cent of its electricity requirement. Other cities and provinces will follow. http://reneweconomy.com.au/2013/beijing-clean-air-policy-casts-another-shadow-over-coal-use-29459

          • Peter B

            Of course “newer coal fired power stations in China are more efficient than most of those (old ones) in the US”. All new power stations have better technology. It is the average pollution output of the extant infrastructure that matters not the relatively small % of new ones. China is deploying these new plants in areas to prevent/lower air pollution and not save the world from CO2 increases. Chinese leaders care about their own people as well as their own longevity and not necessarily saving the world. Visiting Beijing for work regularly between 2000 and 2008 it was appalling to monitor the gradual change from a gritty taste in the mouth from dust pollution to a metal taste in the mouth from the industrial pollution. It certainly focuses ones priorities. CO2(e) reduction is a just good by-product.

        • Giles

          I’m sorry it’s so opaque. The Coalition has been campaigning to repeal the carbon price because it says it is damaging business, coal miners included. This article seeks to point out that the main problem for coal miners is that no-one wants the extra coal that they are determined to dig out of the ground.

          • Motorshack

            That was clear enough, but Peter B said he was confused about your own opinion on the utility of the carbon tax, and we were all taking guesses on that issue. Is a collapsing export market sufficient to save the climate from the coal industry, or do you think Australia should keep the carbon tax as well?

          • Giles

            we need a carbon price because emissions come from lots more places than coal. Although coal is an obvious place to start. Most smart companies already factor in a carbon price, the US is introducing a notional “social cost” of carbon, so we might as well have it out in the market, so people can see that it is real, the market can find the cheapest abatement, and we can scale it up when we go for real ambition rather than just a 5% reduction.

    • JonathanMaddox

      Very simple. A domestic carbon emissions price is designed to address domestic emissions in Australia and would have little effect on coal exports, except the charges for fugitive methane and for emissions from fuel consumed in mining the coal and getting it to port. It would have no effect whatsoever on demand for coal from abroad.

      On the other hand, Chinese policy has an enormous effect on demand for imported coal. Partly because the Chinese government wishes to cap coal consumption in China, but also because Chinese domestic coal production is at an all-time high and this is cutting severely into imports.

      This last point can’t be emphasised enough. China only became a net coal importer five short years ago. Since then it has always produced the bulk of its own demand domestically. Numerous small (and dangerous) older mines near population centres have been forcibly closed, while many large open-cut mines in more remote inland areas have started production in recent years without sufficient transportation infrastructure to get their entire production to the coastal demand centres which are nearer the coast and could get coal more cheaply by sea — but the mines have been working nevertheless and have been stockpiling coal. In the meantime, rail capacity has been built which is displacing imports by sea.

      http://qz.com/118588/china-will-soon-have-40-more-coal-than-the-combined-weight-of-the-human-population/

  • Phil of Brisbane

    Great news Giles. These Coal-ition deniosaurs will end up being dragged kicking and screaming back to the renewable future!

  • Chris Fraser

    Maybe Direct Action was a policy designed to improve Greg Hunt’s career planning. Now that he’s the Climate Minister, we might have to give him one or two terms in government, so we can get him out of government with a good super payment, and onto the Board of Directors of a dying-in-the-bum thermal coal export company. Hope his family likes the climate in Queensland.

  • Poster Atat

    A carbon grade on products would allow consumers to buy from clean factories.