2017 has been a year characterized by a clear upward trend in electricity and gas prices, not only in Europe but also globally. And in this rise, coal prices have once again played a key role. This commodity influences the prices of electricity, based on its share in the generation mix, but also in gas prices, as a source of substitute energy.
Coal in 2017
During 2017, coal prices have remained unchecked upward, following the trend begun in 2016. As we know, the main driver in this international market is China and its policies, being the main producer (48% of the total) and in turn the main consumer (52% of the total). In its fight to reduce air pollution in its cities, China undertook a change in its energy model in 2016, reducing its productive capacity with the closure of many of its mines, as well as reducing working hours, and encouraging the shift towards natural gas in industries and in electricity generation. However, these changes in energy policies require time and investment. After the drastic reduction in its production, China has been forced during these last 2 years to import foreign coal to cover its demand, less elastic. All this has led to a significant increase in global coal prices. Although the price escalation was slowed during the first quarter of 2017, the low rainfall (also in China) has caused an increase in coal-fired electricity generation this year, boosting prices again. In Europe, the reference API2 has reached values of 90$/t at the end of December, reaching maximum values for the last 5 years.
The increase in demand in China due to the lack of rain, as well as the economic recovery in India and the United States, have allowed this 2017 to close with a slight increase in the demand for coal, after two years of decline.
The demand for coal in the coming years
In fact, according to the IEA (International Energy Agency), the forecast for the next 5 years is a stagnation in demand, given that the increase in consumption by India and Southeast Asia will offset the reduction by Europe, United States and China. Currently, coal is ubiquitous in countries such as India, Indonesia, the Philippines or Vietnam, where it represents the fastest and most economical option to supply its population with electricity given its abundance and the existence of infrastructures. Despite the fact that, in some of these countries, such as India, renewable energies are already being committed, they require time for their implementation and impact on the energy mix. Consequently, in India it is expected that coal production will double by 2020, and in Indonesia an increase in electricity generation capacity is expected in 35GW by 2020, with 70% of this being due to coal burning.
In China, however, a slight reduction in coal demand is expected, once the hydraulic capacity is recovered and progress is made in the shift towards gas in its industries. Although the productive capacity will continue to be reduced, imports will be slowed to a large extent, since new capacity will be increased, but it will be more efficient. It is expected that coal will continue to represent 55% in China’s energy mix by 2022.
In Europe, the future of coal is linked to Poland and Germany, since they represent more than half of the coal consumed in the European Union. In Poland, demand is expected to remain intact, but in Germany there is a slight reduction in the use of coal. Although Germany has closed a large part of its nuclear power, this capacity has not been replaced by coal, but by renewable or natural gas. The rest of the countries have undertaken a strong commitment to abandon coal-fired plants, with the aim of reducing carbon emissions. In this sense, France has committed to finish with coal in its mix for 2022, UK and Italy by 2025, and the Netherlands, Finland and Portugal by 2030.
However, the coming years present a strong uncertainty for coal prices derived from possible changes in imports to Asia (China, as well as to Japan, Korea and Taipei). In recent years, stability in Southeast Asia provided a certain level of comfort for exporters. However, the situation going forward will be different: Japan has started a strong implementation of renewables, as well as the reactivation of its nuclear; the Korean government tries to reduce coal in its energy mix; and in Taipei, there is strong social opposition to the use of coal.
The supply of coal in the coming years
On the supply side, uncertainty is also served. Beyond China, the increase in domestic demand in Indonesia and its problems to increase its production, such as those already presented in 2017, can push prices up even more.
From now on, a coal price market with increasing volatility awaits us. Prices will continue to depend on China’s economic policies and circumstances. In fact, we have started 2018 with two new government measures: the reduction of restrictions on coal imports to speed up customs clearance, to reduce storage costs; and the promotion of megamineries, large companies capable of modernizing the sector and reducing inefficient capacity.
But, in addition, the United States can also begin to play an important role as a “swing supplier”. Recent regulatory changes are allowing a reduction in costs for US coal producers. With small domestic use in coal-fired plants, where it competes with very low gas prices, exports have increased significantly. In the absence of official closed data, it is estimated that in 2017 exports have increased by 46%, going to countries such as India, China, Brazil, Mexico or Germany.
Susana Gómez | Energy Consultant