Coal at a crossroads as ‘rational’ thinking sets in

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A new report released by Deutsche Bank says the global coal market faces a combined threat of steadily growing supply and a levelling-off or decline in demand. A threat, it says, that should guide rational decision-making to delay all major expansion. But will governments really act rationally?

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What’s going on with coal? The new lows in demand for electricity from coal-fired power plants in Australia have people wondering if this is the carbon price doing its thing. That is what the Labor Party claims, releasing analysis today that shows power generated by coal power plants has fallen 14 per cent since the introduction of the carbon price, while renewable power has soared.

But there’s a lot more at work here than just the carbon price. According to a commodities special report released on Thursday by Deutsche Bank, what’s happening in Australia and in the global coal market is part of a major shift in rational decision making about energy supply and demand.

The report, Thermal Coal: Coal at a Crossroads, says coal markets face a combined threat of steadily growing supply in the largest producing regions and a levelling-off or decline in demand in consuming regions.

“We believe this trend will develop out of emissions control standards, higher renewables output, a structural shift in the Chinese economy, improved transport infrastructure, and stagnating US demand,” the report says. And it points to three of the world’s most important demand centers – China, Europe and the US – as containing “the seeds of a softening in demand growth.”

“As demand disappoints versus producer expectations, rational decision-making will require that major expansion projects be delayed,” Deutsche Bank says. The same kind of rational decision-making that has seen plans for more than 150 new coal-fired power plants cancelled in the US since the mid-2000s – and predictions that upwards of 200 coal-fired generating units will be retired across America in the coming years.

And the kind of rational thinking the Indian National Green Tribunal said was clearly missing when it granted environmental clearance for a 1,050MW – a decision it overturned last month, describing it as “smacking of non-application of mind.”

As Sierra Club’s Justin Guay points out, this is just the latest in a string of rulings by India’s NGT that strike at the heart of the nation’s proposal to dramatically expand its reliance on coal. But to understand the importance of the latest ruling, Guay says, it’s important to understand where the project was sited:

“Chattisgarh, along with neighboring Jharkhand, makes up the heart of Indian coal country. This is where India’s remaining forests, coal, and indigenous peoples combine to form a volatile mix. It’s also where opposition to the coal industry is so dangerous you can be murdered for it, even if you are a nun. It’s here that the coal industry assumed that plans for yet another big coal plant would hardly be noticed, let alone challenged.”

But in this case in India – as is also seen happening elsewhere around the world (even in Australia) – some brave locals turned anti-coal activists decided enough was enough, says Guay. “They took advantage of the fact that the NGT gives locals the right to challenge any project anywhere in the country on environmental grounds.”

Campaigns such as this, wrote Paul Gilding on RenewEconomy yesterday, “are the only thing likely to moderate the rude economic awakening we face when the global carbon bubble bursts and the fossil fuel industries start their inevitable and terminal decline” – a threat to which Australia is particularly exposed.

“Fortunately for Australia’s economics prospects,” Gilding says, “these green campaigns are amongst the most strategic and effective ones we’ve seen from the NGO community for many years. Unlike traditional environmental campaigns that tend to raise an issue and demand government intervention, these campaigns are displaying a more sophisticated approach, taking on the industry with a clear view of how markets work.”

And the markets, for coal, are not looking so good. In its report yesterday, Deutsche Bank wrote that, as a result of the combined threat facing coal, its base-case scenario forecasting coal prices out to 2020 assumes “only a very small increase in net new capacity, and leads to their “forecast of nominal prices of $95/t in 2015 and $101/t in 2020 on a FOB Newcastle basis. In 2013 real terms, these prices are $91/t and $85/t, respectively.”

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It does, however, concede that its base case scenario assumes “rational behaviour” on the part of producers, and that “there is still a risk that current plans for capacity expansion may be followed through to completion despite slow demand growth.” So they have also modelled a “bear case” as an alternative to their base case, in which global export potential exceeds import demand by 356mt in 2020.Screen Shot 2013-05-10 at 11.20.57 AM


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