IEA coal outlook blithely ignores the big picture

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Despite a 10% cut to coal consumption forecasts, the latest International Energy Agency medium-term coal market outlook distorts the underlying data being presented.

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The International Energy Agency’s latest “Coal Medium Term Market Outlook” trims its central scenario projection for annual coal consumption by over 500 million tonnes coal equivalent (Mtce) by 2020 — a nearly 10 per cent cut from what IEA forecast last year.

Yet the agency seems either unwilling or unable to give its findings full voice.

coal-dig

The report, released this past Friday, is peppered with display type—captions and headings — that actually distort the underlying data being presented. Headlines like “Coal Consumption Will Keep Increasing,” “Renewables Will Only Slow the Growth in Coal” and “Climate Policy Will Not Impact Much in the Next Five Years” read like an editor is trying valiantly to uphold a coal industry view that comes down to, “Pay no attention to the facts, ladies and gentleman, even if they suggest just the opposite of what we’re putting in bold type.”

Indeed it’s quite telling that the six boxes in the document detailing the organisations that supported this report are mostly companies whose share prices have collapsed in the last year, coal industry lobby groups, the Polish Government (proud owner of one of the largest loss-making nationalised thermal coal industries) and a couple of struggling coal utilities. Glaring omissions included any presence of renewable-energy or energy-efficiency industries (bizarrely presented on the front cover as blank boxes almost to emphasis this lack of peer review).

IEEFA’s core issue with IEA is that its outlook for coal-industry growth is overly optimistic given current market conditions. The IEA estimates that global thermal coal demand will grow at a compound annual growth rate (CAGR) of 1.1% through to 2020. The agency sustains this projection by cutting off the data at 2014, and ignoring the impact of 2015 performance on its modelling assumptions. The IEA to put bluntly, simply does not use current real-world coal data to stress test its modelling.

The IEA report acknowledges that China’s coal consumption declined in 2014 by 2.9% and goes so far as to say further declines is possible in 2015, notwithstanding that January-November data from this year already shows China coal consumption down 5% (domestic production down 3.7% and coal imports down almost 30% year on year).

The IEA does also devote a section of the report to explaining why China coal consumption declined in 2014, but concludes that the drop is a temporary aberration relating largely to a potentially one-off decoupling of electricity demand from economic growth combined with “a seasonal effect” from hydro-electricity in 2014.

This ignores that hydro-electricity production has continued to grow in 2015, while the decline in coal-fired power generation has accelerated in 2015. The modelling basis for the conclusion that coal consumption in China will deliver a 1.3% CAGR through to 2020 is, in IEEFA’s view, overly optimistic and not supported by the facts.

It’s very noteworthy, however, that the IEA has acknowledged for the first time that a “peak coal scenario” in China is now probable, and that coal consumption in China might have peaked in 2013. This would dramatically alter the IEA’s still central “New Policies Scenario” conclusions. Here’s some specific IEA acknowledgement on this scenario: “In fact, China turns into a net exporter of thermal seaborne coal.

The IEA boldly forecasts Indian domestic coal prices rising nearly 60% in the five years to 2020 in real terms (a doubling in nominal terms) even as the agency is finally, and belatedly, expecting real coal prices to continue to fall in every other market through to 2020. Coal India Ltd shareholders might be delighted to know this, particularly given the Indian Government has been pursuing an aggressive, across-the-board deflationary energy strategy in the last 18 months.

The reverse auctions for private firms to acquire thermal coal deposits have been specifically designed to drive down long-term contracted domestic-coal fired electricity prices in real terms. Solar auctions over 2015 have repeatedly set ever lower electricity tariffs that are fixed in nominal terms for 25 years — an inbuilt deflationary benefit that will lower real solar wholesale prices by a contractually agreed 5% annually. Just why domestic Indian coal prices are assumed to double in the next five years in the second-largest coal producing nation in the world is a detail IEA seems to think is not worth discussing.

Also on India, the IEA sees domestic Indian coal production with CAGR of +2.1% through to 2020, consistent with the five years prior to 2014, but a rate of growth at only a quarter of that delivered in 2014-15 and again year to date in 2015-16 (Coal India’s April-November 2015 report details 8.8% growth). Just why the evidence of the last two years is dismissed is not clear.

IEEFA would note also that the IEA projection of a CAGR of +1.3% in the seaborne coal market to 2020 would actually be a rapid decline if Coal India’s progress was in any way projected to continue, given India is the key market driving the assumption that the global seaborne market can continue to grow.

Likewise, the target of the Indian Government to cease thermal coal imports within two-three years is dismissed without discussion. The IEA forecasts that Indian thermal coal imports will grow at a 7.9% CAGR through to 2020, notwithstanding that India’s November 2015 coal imports sank to 11.6Mt, down 49% from the year before, while for April-November they were down 12% at 112Mt.

On one key point, IEEFA would agree entirely with the IEA conclusion. This report concludes that there is already excessive coal mining, rail and port infrastructure capacity in place given the significantly overestimated demand estimates previously used. As such, in relation to Adani’s Carmichael proposal (60Mtpa), GVK’s Alpha (32Mtpa) and Kevin’s Corner (30Mtpa) coal, MacMines China Stone (55Mtpa) and China First Coal (40Mtpa), the IEA states:

“It is not likely that the above listed projects will be operational by 2020, if ever.”

The report’s front-page headline —“climate policy will not impact much in the next 5 years”— seems quite at odds with the financial markets’ reaction to the COP 21 in Paris.

The unexpectedly strong outcome of the COP21 in Paris has seen many coal company share prices decimated over the last month (Peabody Energy (down 37%), Consol Energy (down 13%), Whitehaven Coal (down 30%), China Shenhua (down 7%), Adaro Energy (Indonesia, down 13%) and Stanmore Coal (down 32%)), illustrative of a global trend of underperformance as investors act on increasing stranded-asset risks.

The extension of the Investment Tax Credit of 30% for US wind and solar for another five years will have a very material positive impact on solar and storage development in the U.S. in the next five years, with a significant global flow-on benefit.

The inevitability of a global electricity system transformation has been reinforced by the success in Paris, and investors, corporations and governments are increasingly moving to accelerate the transition to a lower-emissions economy and exit stranded fossil fuel assets.

In IEEFA’s view, the IEA’s projections for coal to 2020 continue to underestimate the rate of technology innovation, the increasingly global move to price in carbon pollution and the resulting dramatic shifts in relative electricity generation costs for coal versus gas, nuclear, hydro and renewable energy. The modelling also simply does not account for the financial disarray of the coal industry and the inability of its individual companies to find a business model that works in a declining market.

The IEA models blithely ignore the real world financial condition of the companies that actually mine the coal. The successive solar auctions in India over recent months in India (SunEdison’s US$500m 500MW November 2015 solar contract at a record low Rs4.63/kWh (US7.1c), and SoftBanks’ US$350m 350MW December 2015 at the same price) highlight the massive disruption that is pending from ever lower cost solar power generation contracted to deliver a 5% annual real price decline. Storage will only accelerate this trend.

Tim Buckley is IEEFA’s  Director of Energy Finance Studies, Australasia



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8 Comments
  1. Reality Bites 4 years ago

    The Indian’s might need to build more solar to avoid a power crisis because they cannot dig up enough of their own coal to feed the existing coal fired generation units: http://www.hindustantimes.com/india/coal-shortage-may-lead-to-power-crisis-in-five-states/story-jinGTnO4YAvKRAtKxGklIM.html
    Can you factor that in to your next “Analysis”.

    • trackdaze 4 years ago

      Is it not because the coal generator dvc is going broke not paying a number of miners and they have cut supply?

      Sounds like much of what the story suggest in terms of downward pressure on prices is coming to bare on coal in india.

      • Calamity_Jean 4 years ago

        Yes, according to the linked story in the Hindustan Times, the electric generator DVC isn’t getting paid for its electricity, so it can’t pay for the coal it needs.

  2. neroden 4 years ago

    It’s worth pointing out the squeeze which is killing existing coal mines and existing coal burning plants.

    Normally, with a drop in coal demand, coal would get cheaper, and that would cause coal to become popular again.

    But in a typical location, over half the cost of thermal coal is transportation cost now. And the transportation cost just keeps going up. So the price paid by the power plants keeps going up even as the price paid to the mines goes down.

    So the mines go bankrupt while the power plants also go bankrupt: from the point of view of the mine, the price is too low to be worth mining, but from the point of view of the power plant, the price is too high to compete with natural gas, wind, or hydro.

    This means that the only coal power plants which are likely to survive for even a few more years are the ones which are literally located next to coal mines.

    • Calamity_Jean 4 years ago

      This also means that the only coal mines that will survive are ones that have coal power plants located next to them, or mines that produce metallurgical coal.

      • neroden 4 years ago

        Good point. Metallurgical coal commands a *huge* premium over thermal coal, incidentally. Look at anthracite prices.

        • Calamity_Jean 4 years ago

          It seems the transportation cost is serving the same function that a carbon tax would.

  3. john 4 years ago

    The Newcastle thermal coal futures price out to 2019 is in the US$43 a tonne range.
    An analysis in India about buying foreign thermal coal mines came to the conclusion that Australian thermal can not cover their cost of production.
    Indonesia being a larger producer of thermal than Australia even they are feeling the pinch of falling prices.
    All up the outlook is not exactly very bright.

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