Back in June 2013 Wood Mackenzie, a high-profile mining and energy consultancy favoured by the coal industry, boldly proclaimed that Chinese thermal coal demand would double to approximately 7 billion tonnes a year by 2030.
Just on two years later it is clear that the company hopelessly over-estimated crucial factors affecting demand, not least the determination of the Chinese Government to take decisive action on the country’s appalling air pollution.
How did WoodMac – as the consultancy is widely referred to – get China’s coal demand so wrong?
Who is WoodMac and what do they do?
While Wood Mackenzie started in the early 1970’s as a Scottish consultancy specialising in North Sea oil, its coal work only came to the fore after 2007 following its purchase of two other consultancies, Hill & Associates and Barlow Jonker.
The creation of WoodMac’s coal team came just as the global export thermal coal price was beginning its climb from its early noughties’ slumber in the US$50 a-tonne-and-below mark towards the giddying peak of over US$190 a tonne in July 2008. Even though prices dropped back towards the $100 a tonne mark it was still heady times for coal companies.
WoodMac was well positioned to pick up work from coal companies and government agencies alike. It produces a steady stream of analysis and pricy reports which garner the attention of financial analysts and resources journalists. Most coal industry conferences feature a speaker from WoodMac or, at the very least, numerous speakers cite their data in Powerpoint presentations. WoodMac’s coal price estimates are also widely cited by companies in presentations to investors and analysts. Even the influential International Energy Agency cites their work reverentially and gets WoodMac to peer review some of its reports.
WoodMac is even a member of the National Mining Association, the peak US mining industry lobby group which states that its mission is “to build support for public policies that will help America fully and responsibly utilize its coal and mineral resources.”
Underpinning the seaborne coal market boom was the phenomenal growth in Chinese imports. From being a small-volume importer in 2007, by 2013 Chinese imports of thermal coal rocketed to 264 million tonnes. In just a handful of years China grew from being a bit-part player to accounting for a whisker under a quarter of the seaborne coal market. Not surprisingly, small changes in Chinese policy could have a huge impact on export coal producers and the global climate.
As the China-driven export coal boom gathered momentum it was a great time to be a coal consultancy: new power stations, mines, ports and railways were being proposed all around the world.
Proponents of power stations based on imported coal needed to know what likely long-term fuel costs would be. Coal mine proponents needed to know how their projects stacked up against potential competitors and where the new growth markets were. Without seemingly solid data, banks wouldn’t lend the billions needed for new projects.
As project proposals proliferated, WoodMac was on hand to provide advice. On its website it boasts that “our comprehensive analysis of global coal supply allows you to better understand opportunities, risks and challenges to give you a sound foundation for investing and planning.”
The China coal syndrome
By January 2013 the ‘airpocalpyse’ pollution event had raised considerable doubts about the dominant coal industry view that Chinese coal consumption would continue to climb for a long time to come. Chinese officials, commentators and some financial analysts discussed the possibility of a cap on coal consumption, new pollution standards and increased renewable electricity generation.
When WoodMac released its China: The Illusion of Peak Coal report just before World Environment Day five months later, there were good reasons to doubt its emphatic tone. “It is very unlikely that demand for thermal coal in China will peak before 2030,” WoodMac’s President of Global Markets, William Durbin, said in a media release.
WoodMac reeled off a plausible sounding list of developments which they argued would drive Chinese coal demand ever upwards for the foreseeable future: new power plants, coal-to-chemicals conversion as well as new coal-to-gas and coal-to-liquids plants. Besides, Durbin argued, provincial governments “seeking investment, jobs and tax revenues” were keen to promote coal projects.
Lest WoodMac be viewed as a starry-eyed booster, Durbin stressed that it had already taken into account “a rapid improvement in energy efficiency the likes of which have not been seen.” In the media release Durbin stated that he expected “power demand per unit of GDP to fall by half in just 17 years, an extraordinary achievement for an economy experiencing such sustained growth.”
For coal companies, Durbin insisted there was a further potential upside if the estimated efficiency improvements did not materialise. “In the absence of alternatives,” he said in the media release, “coal demand could increase further.”
While WoodMac discounted the likelihood that coal demand would be undermined by gas it made no explicit mention at all of solar and wind, installations of which were already beginning to ramp up.
While acknowledging the possibility that government mandates to reduce coal consumption would require large-scale investment in alternatives, pollution control and reduced economic growth targets, WoodMac discounted the likelihood it would happen. “What is noteworthy, however, is that there is greater potential for further [coal] demand growth beyond our expectations,” Durbin said.
But like so many booms, the bust inevitably came, far sooner than expected.
The devil is in the detail
If WoodMac’s pitch for why a doubling of Chinese coal consumption in just 17 years not only sounded plausible but could even be an under-estimate, the devil was always going to be in the detail.
Where WoodMac estimated a halving of power demand per unit of Gross Domestic Product (GDP) by 2030, it turned out this was actually achieved in 2014. In the first four months of 2015 the ratio, based on data from the National Bureau of Statistics of China, dropped further to just 0.1 per unit of GDP.
A year after Durbin’s up-beat assessment of Chinese demand, WoodMac was struggling to catch up with the profound changes in Chinese energy policy.
In September 2014 WoodMac’s analyst Rory Simington suggested that while coal was “facing headwinds with coastal demand flat” he felt confident enough to state that Chinese “imports will keep growing.”
When it came to estimates of longer term thermal coal import demand Simington went on to suggest that while over-capacity would persist until around 2020, the longer-term trend was up. More coal mines would be needed to fuel new power stations in Asia, his presentation asserted.
Chinese power generation though was in a state of profound transition. The rise of renewables, energy efficiency and increased hydro generation were wreaking havoc on Chinese coal demand. Cuts in coal-generation in coastal regions as well as restrictions on the quality of coal imports were having a further destabilising effect on the market. While the possibility that the seaborne thermal coal industry was in structural decline was being widely canvassed by leading analysts, it is a phrase which has yet to appear on WoodMac’s publicly-available analysis.
By March this year though, WoodMac conceded that the outlook for Chinese coal imports was anything but rosy. WoodMac’s senior analyst Jonathan Sultoon told a Canadian mining industry conference that, for both thermal and metallurgical coal “the wave of oversupply is absolutely staggering.”
“We are also forecasting negative growth into China for imports in 2015,” Sultoon told the conference.
After the crash
The speed with which WoodMac’s claims of a doubling of Chinese thermal coal demand by 2030 have collapsed is a telling case study of how flawed ‘projections’ of future coal demand can be, even in the very short term.
The media shares some of the blame too. All too often WoodMac’s estimates of future demand are credulously reported in single-source stories in mainstream outlets. In the absence of any other source contesting their analysis a general reader is left with the impression that WoodMac’s outlook is beyond dispute, reinforcing the aura that its best-guess estimates are in fact ‘forecasts’ of what will be.
Estimates of future coal demand such as WoodMac’s upbeat June 2013 China analysis have real-world consequences.
The discounting of coal’s ‘headwinds’ leads companies to invest in projects doomed to become stranded assets, wasting shareholders’ funds. The pursuit of unnecessary projects has created avoidable social stress and conflict over the profound consequences for land, air and water quality that invariably goes with new mines.
Boom-time hysteria fuelled by flawed growth estimates of demand also unrealistically raised the hopes of pro-coal governments and communities which have been left to pick up the pieces after the inevitable bust arrived.
While no-one expects WoodMac estimates to be perfect, it would be good to hear a detailed explanation on why it is they think they got Chinese coal demand estimates so horribly wrong.
Bob Burton is the Editor of CoalWire, a weekly bulletin on global coal industry developments. (You can sign up for it here.) He is also a Director of the Sunrise Project, a non-profit group promoting a shift away from fossil fuels. Bob Burton’s Twitter feed is here.