What does “peak coal” mean for international coal exporters?

The beginning of the decline of global thermal coal demand is now likely by the early 2020s at the latest.Much has been made of the idea that the international steam coal sector is facing an uncertain future. This future is indeed highly uncertain. However, this report goes further. Our analysis suggests that, in our central scenarios—those we consider most likely—global demand for steam coal will very likely stagnate (more or less) until 2020 before going into decline during the early-to-mid-2020s.

Secondly, this study uses the COALMOD-World global coal market model to analyse potential impacts of a range of likely stagnation and declining global demand scenarios on major coal producers, consumers and investment. Based on these results, this report sounds an alarm bell for major exporting countries heavily invested in a continuation of business as usual demand from major developing economies.

This change will be driven by both climate and non-climate policy factors.Some frequently used scenarios still project either a stagnation of current levels of global thermal coal demand for the foreseeable future or modest growth out to 2040. In general, such scenarios—which are often qualified as based on current or moderately altered policy settings—see demand in Europe and North America declining, but offset by steady consumption growth persisting in India and the Middle East, South East Asia and Africa and demand remaining stable in China. However, such scenarios struggle to adequately address three factors that are already demonstrating the capacity to quickly shift the fundamentals of the global market for coal:

• The speed of technological change;
• The iterative nature of the climate policy game;
• Other non-climate policy trends affecting the social, environmental and economic case for coal.

Figure ES.1 presents five scenarios explored in this report. Of these five, four suggest a decline in coal demand from the next decade at the latest. Those that we ultimately consider to be the most likely scenarios in the short-term, i.e. between now and ~2025, are the ECT1, ECT2 and potentially the ECT-squared scenarios. The scenarios are based on current policies but also include both climate and non-climate policy factors, especially with regards to developments in India and China. In the medium-to-longer term, i.e. beyond the mid-2020s, we see coal demand potentially declining more quickly, as forces driving short-term trends intensify and are supported by stronger climate action. (This is therefore not a prediction of coal demand out to 2050.)

There is now a good chance that coal demand from China has not only peaked, but will begin to decline in the early-to-mid-2020s and that Indian demand will not replace this decline.Conditions on the ground in China point to a policy debate that is increasingly looking to move beyond existing policy of a simple cap on coal consumption by 2020. There is evidence of this already in China’s heating sector, where a strong push phase out coal exists that is linked to air quality concerns. Further, there are also signs that debates about how to remove over-capacity in coal power emerging in China. Coupled with continued growth in clean energy investment, and improvements in infrastructure between regions to tap stranded clean energy sources, this would likely see coal demand squeezed in China over the coming decade. Moreover, in the event of an EU revision of its Paris commitment pre-2020, we see a revision of China’s Paris Climate commitments as also possible. This would likely hit coal demand first.

Continuation of rapid Indian demand growth at recent speeds also seems unlikely. Despite a large push to upscale domestic production capacity to over a billion tonnes per year, coal power production capacity is currently at just 60%, given the large number of idle plant. New plant coming on line are generally more efficient supercritical plant, are serviced by higher quality coal (in light of new coal quality standards) and therefore will consume less coal for the same output. Significant expansions of alternatives including major investment initiatives in wind and solar, nuclear and gas are also likely to go ahead during the next decade. Against this, it remains unclear to what extent Indian manufacturing or residential demand will pick up in the coming decade.The existing government in India is increasingly appearing to be determined to push ahead with a pro-climate mitigation agenda for the country’s energy system. Given favourable domestic conditions for renewables, a key question is therefore the extent to which existing barriers to higher penetration rates can be removed, so as to enable energy access to be expanded through renewables rather than coal. In principle, many of these barriers can be resolved as in other jurisdictions, if political will exists. Emerging battery storage solutions could also be a game changer potentially offering ways to shortcut infrastructure and other energy access constraints for small and medium scale consumers.

The impending decline in global coal demand will hit major exporters—such as Indonesia, Australia and South Africa—hard, if they fail to anticipate it. Given that China and India account for roughly half of global coal imports, what happens to demand in India and China will be critical and cannot be compensated for by demand increases elsewhere. Modelling results using the COALMOD-World coal market model show that even relatively small declines in domestic coal demand from large consumers can have large impacts on major exporters.

For instance, China in 2015 imported 270 million tonnes out of an annual consumption of 3.97 billion tonnes of coal (just 8%), while producing the remaining 3.7 billion tonnes domestically. Consequently, a similar order decline in Chinese coal consumption—of say 5 to 10%—could technically allow China to replace the majority of its imports with domestic production. While Chinese infrastructure bottlenecks could limit short-term substitutability, Chinese coal is also somewhat flexible and infrastructure are being developed. In the medium term, especially if declining coal consumption were to create political economic concerns about domestic mining regions, major exporters to China, such as Australia and Indonesia, could find themselves in a very vulnerable position quite quickly.As the second largest coal consumer, India’s coal demand from abroad is a second option for Asia Pacific and even South African producers. However, Indian imports are currently roughly 60 Mt for a domestic market of over 850 Mt in 2016 (i.e. 6.5% of consumption) and thus unable to offset a significant drop in Chinese demand. Moreover, there are increasing signs that Indian domestic coal production may grow faster than domestic consumption. Infrastructure and coal allocation challenges notwithstanding, the short-term outlook for Indian coal imports seems more likely to remain stable and the medium to long term outlook suggests decline. A decline in Indian coal import demand would first and foremost hit South African coal exports hardest. However, if Chinese import demand were declining, even a stabilisation of Indian demand could have significant knock on effects in South Africa as Pacific suppliers—and the US—simultaneously seek an outlet for surplus capacities.

Policymakers need to understand that coal transition scenarios do not have to be “<2°C-compatible” to strongly impact major exporters.The sensitivities of the global coal trade to the domestic policies of a small number of large developing countries, highlights an important but underappreciated fact by coal sector stakeholders. Namely, even if, in the short term, countries do not implement climate policies consistent with the goals of the Paris Agreement, major exporters can still be strongly affected.

In thermal coal exporting economies, the coal global trade is often deeply embedded in domestic energy, regional and fiscal policy. Export revenues and related taxes are often important to, inter alia, subsidise domestic (coal-based) power prices, pay for local infrastructure, employ lower skilled workers in specific regions, and contribute to balancing budgets through tax revenues. Conversely, governments are wont to provide various supports to the sector in return for expectations of longer-term economic benefits. However, the scenarios explored in this report suggest that it is time for governments to begin to prepare and implement credible transition policies. The transition may well arrive sooner and more disruptively than currently anticipated.

Investors, businesses and policy-makers need to develop a more nuanced view on the drivers and potential non-linear inflection points of transition in the global coal steam market. The most likely scenario for global coal demand in the short term is a non-linear transition, driven by feedback loops between technological change, local environmental and macro-economic factors, and climate policy.The pace of technological change, particularly in the field of renewable energy technologies, has continually surpassed expectations over the past decade. Impressive developments in energy storage are already occurring will help to reinforce the capacity of renewables to displace conventional generation technologies, first by supporting distributed generation and providing energy access, but ultimately also alternatives to firm capacity that provides a competitive range of system services.

The political power of air quality concerns, similar growing concerns about water requirements for coal-plant cooling in water scarce regions, and concerns about fly-ash pollution of arable land are growing in large developing countries. These concerns will contribute to further increasing pressure to close old plant, while raising the cost of new coal plants. Where alternative fuel technologies can address these concerns at (close to) equivalent cost, and in an energy secure manner, coal will increasingly come under pressure. While further developments on the economic, technology and social acceptance of very high penetrations of RES will be needed to achieve <2°C mitigation scenarios, existing trends are enough to force the beginning of the decline in thermal coal demand in the coming 5 years or so.

Social constraints could, if not addressed, potentially slow the growth of alternative energy sources, but even this will not save the coal sector. It cannot be ignored that alternative energy sources to coal also pose social and other constraints and that this can slow their implementation. Societal acceptance of alternative energy technologies, and continued adjustments to regulatory and market conditions is of course crucial to achieving the penetration requires to achieve the Paris climate goals. However, this paper argues that even relatively small ramp ups in alternative energy sources at the global scale will send coal demand into decline. For instance, displacing just 5-10% of Chinese coal demand could potentially send the global seaborne trade into a death spiral, as excess export capacities compete for a substantially smaller global market. Moreover, our view is that social acceptance factors to renewable energy will be binding, but are not insurmountable through learning by doing and copying of best practices.

Economic growth is also not a panacea for coal. There is strong evidence that the world is in for slower and less economic growth led by the energy industry in the coming decade, than during the previous two. Future policy developments may therefore be non-linear in their impacts on global demand. Investors, businesses and policy-makers need to develop a more nuanced view on the drivers and inflection points of transition in the global coal steam market.

We therefore constructed two scenarios with bottom-up information on the energy transition and coal demand in China, India and other major coal countries (Enhanced Coal Transition scenarios). We contrast them with a Business as usual scenario for global coal demand as well as a 2°C scenario that is much more ambitious in terms of coal demand reduction.

Exports cannot save US coal. In the USA, shale gas and coal power plant shutdowns have freed up a lot of coal for the global markets. However, without West coast export terminals, transport costs are too high to become a “base load” supplier in the large Asian markets. Rather, the US exporters will become the marginal suppliers in the global markets and are first hit by coal transition efforts and a shrinking global market. This is likely to intensify the challenges currently facing US coal suppliers, independently of climate policy.

Policy makers in coal exporting and importing countries should be engaging in dialogue on the medium and longterm future of the coal sector.There is a tendency for policy makers in major coal producing economies to sometimes struggle, from a purely domestic vantage point, to grasp the full scale of the risks posed by external factors. Conversely, major consumers may well stand to be impacted by policy developments in supplier countries as they react to a declining global market pie. A first step for policy makers to anticipate and manage these uncertainties is through a focused dialogue on the future of the sector in their respective countries.