Are we heading for Peak Coal?
As Asia is embarking on a massive expansion of coal-fired power generation, supplies of the high-quality fuel required are being squeezed. And that means the price of coal could soon catch up with oil.
Peak oil, yes; but peak coal? India's Tata Power recently acquired 30% stakes in Indonesia's two largest coal mines, securing 20 million tons of coal to fuel its 750 kilowatt project on India's west coast. This is a shrewd and opportune move.
There's a sustained and tightening squeeze on global supplies of the 'thermal' coal needed to power the world's coal-fired power stations, just as Asia (except Japan) embarks on a massive expansion of planned generating capacity based on coal, despite rising concerns about carbon pollution. The technology that needs to be deployed to separate and store the pollutants from coal burning is still at least five years away.
Meanwhile, disastrously polluted China brings a new coal-fired station on stream every week to help 'keep the lights on' and power its frantic industrial growth. The Chinese plan to triple generating capacity to 500 gigawatts by 2030. India is driving to triple its generating capacity by 2010. South Korea is adding 7.3 gigawatts in the next several years, and Vietnam has announced that it's to spend billions on coal power due to its soaring economic growth, combined with fears that its off-shore gas reserves may not be as large as initially anticipated.
Even 'green' Japan is adding 10 new coal-powered stations, without decommissioning any of its existing ones.
Consequently, the price of seaborne coal in Asia has risen by over 40% this year, with the prospect of higher prices in the years ahead. It's clearly a sellers' market.
A pivotal problem is emerging in the shape of China, which is radically upsetting the market. It is becoming a net importer of coal for the first time for a variety of reasons. Until now, China regularly exported between 80m-100m tons, largely to South Korea and Japan, both of which are totally dependent on coal imports.
And it's going to have to import a lot more, which may sap Asian supplies for years to come, hence the scramble among Asian governments and power utilities to clinch long-term, fixed price contracts with the mines. As it is, over half of global 'thermal' coal is traded via direct contracts between power companies and mines.
China may be the largest coal producer in the world but it is facing increasing difficulties in supplying its industrial south from its northern coal belt at world competitive prices, due to transport costs and the low energy content of much of its coal. At the same time, some 8000 'unsafe' mines, accounting for 5% or more of overall output, have been closed down in the wake of public outrage over the 4,000-5,000 miner deaths occurring annually. It is also importing 'cleaner' coal to try to combat pollution.
So it has been importing coal in increasing volumes from Australia, India, Vietnam, Mongolia and even North Korea. But India, although the world's third largest coal producer, now needs more of its own coal and is having to import coal itself. Vietnam is under the same pressures. It is moving to curb exports to China's Guangdong economic powerhouse region, which have been running at around 20m tons annually.
Australia currently exports over $20bn of coal a year, and is the most important 'switch' producer, along with Indonesia. It has scope to expend production, but is seriously constrained by capacity problems at the port of Newcastle, NSW, and an inadequate rail link from Queensland.
Indonesia is already the world's largest exporter of thermal coal, and is striving to double output over the next five years. It needs a lot of help to do so. At its big annual Coal Show earlier this year, it was made clear that Indonesia needs everything from large excavators and geological surveys to hand tools to get the job done.
So there's no short-term fix to Asia's coal problem, and in the longer-term, the situation could be nearer to the 'peak' oil scene than is generally understood. Careful and detailed independent research by two highly regarded bodies, the Energy Watch Group (EWG) and the Institute for Energy (IFE), suggest that the price and cost of high energy coal is going to catch up with the prices of oil and gas over the next 10-20 years.
Both concluded that global coal reserves are at least 60% lower than suggested 20-25 years ago. They say that the older predictions were made on the 'basis of inadequate data'; and since then a lot of coal has been mined. China, in particular, hasn't updated its reserve estimate for 15 years. It could be within anything of 5-15 years of 'peak' production, according to the EWG, putting a spanner in the country's coal-fired economic growth. And the IFE points out countries like Poland, Germany and the UK have reduced recently their 'estimates' by 50%-90%.
The US is often cited as the 'Saudi Arabia' of coal. But it passed 'peak' production in 1990 and the remainder of its vast reserves are mainly in lower-quality bituminous and very low quality sub-bituminous coal and lignite. Little more than half the world's dwindling reserves are of the best quality coal, anthracite.
At the same time, about 90% of the world's remaining coal is in just six countries (China, USA, Australia, India, South Africa and Russia), which scarcely bodes well for a high security of supply and market 'perfection.'
Given the geological difficulties in developing new fields and the additional infrastructure costs entailed, the world's supply of high grade coal available at anything like today's operating costs is extremely limited.
Prospectively then, as the needle of the world's fossil fuel tank drops towards the 'E' mark, what we are heading towards is a high cost and interrelated hydrocarbon market, involving bilateral, neo-mercantilist deals rather than the free market. As is usual these days, China is at the core of the issue.
By Michael Orme for The Daily Reckoning