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Coal’s place in the shifting global energy mix


Given the mining industry’s extended cycle times, companies regularly look for insight relative to long-term commodity demand patterns. One area that may require more concerted focus relates to the shifting global energy mix.

In many ways, this discussion begins and ends with the outlook for thermal coal. On the one hand, the extent to which societies appear to be embracing renewable generation is catching many people off guard. The environmental issues raised by burning coal are prompting countries across the world to explore a wide range of alternative energy generation options — from nuclear and gas to solar, hydro and wind power.

China’s consumption of thermal coal, for instance, fell 3% in 2014, despite a 3.8% increase in electricity output. In its bid to reduce greenhouse gas emissions by up to 65% from 2005 levels, the country plans to increase its share of non-fossil fuels to 20% of its primary energy consumption by 2030. These are significant indicators given China’s historical role as the world’s largest coal consumer.

Alternative power sources are expanding to bridge the gap. Beyond signing mega-contracts with global LNG suppliers and developing domestic gas supply, including shale, China is investing billions of yuan to fund clean energy production. Already, China plans to increase installed capacity of wind power from 96GW to 200GW, and of solar power from 28GW to roughly 100GW.

It also plans to use natural gas for more than 10% of its primary energy consumption by 2020.

And China is not alone. In 2014, new installations of renewable power plants surpassed 100,000 megawatts of capacity.

None of this is good news for coal producers. Whilst the fall in producer currencies and lower oil prices have given the industry some unexpected relief, these cost tailwinds are providing incentives to increase output at a time when producer discipline is essential if global thermal coal markets are to return to balance.

Despite China’s decision to restrict imports, coal demand is not the real problem. The issue is excess supply. According to Deutsche Bank’s supply/demand models, thermal coal is running a 30 million ton surplus, which is expected to rise to 68 million tons in 2018.

These factors have some people predicting an imminent demise for coal. Certainly, junior coal miners are taking the brunt of this impact, with a high percentage of the sector battling for survival.

 

Preparing for change

On the other hand, most major energy forecasters agree that coal will remain a critical component of the global energy mix for years to come. According to the U.S. Energy Information Administration (EIA), fossil fuels will continue to supply nearly 80% of world energy use through 2040.

Looking at electricity alone — which the International Energy Agency (IEA) says will remain the fastest-growing final form of energy worldwide — by 2040, 56% of power will still come from fossil fuels, with coal accounting for 31% of the mix.

While coal is predicted to lose market share to natural gas and renewables, dropping to roughly 20% of the total global energy mix by 2040, it is not yet on the way out.

In fact, global demand for coal is expected to rise to 9 billion tons by 2019, growing by an average of 2.1% per year.

Energy shortages in countries across Africa, Asia and South America — coupled with an anticipated 40% spike in global energy use by 2040 — may also boost demand for fossil fuels.

There are questions, too, as to whether China can truly afford to stop burning coal at its intended rate. Pollution is a critical issue, but power shortages would cause considerably more social backlash. This may explain why the IEA forecast China’s thermal coal demand to grow to nearly half a billion tons by 2019. Despite China’s efforts to moderate its coal consumption, it will still account for 60% of demand growth during the outlook period.

These demand factors also hinder efforts to curb the production of coal. While countries in developed nations are adopting environmental agendas to reduce reliance on coal, coal production in countries with less stringent regulation may rise apace to meet global demand. This speaks to the imperative for the ongoing refinement of carbon capture and sequestration (CCS) technologies and other solutions that could reduce the environmental impact of coal-powered generation.

Although many argue that the economics of clean coal technologies do not work, new coal-fired power plants currently being built promise to reduce carbon emissions by up to 20%.

Yet, while the demise of coal may be premature, the move to alternative power sources is inevitable. Natural gas, which currently accounts for roughly 20% of the global energy mix, is expected to account for 25% of global energy use by 2040, surpassing coal.

Similarly, nuclear power is enjoying a global resurgence, with installed capacity set to grow by 60% to 2040. Whilst nearly half of the world’s current operating reactors will need to be retired by that date, over 60 new reactors are under construction in 15 countries.

Although some uranium producers are struggling to realize a profit at current prices, several low cost U.S. producers have signaled an intent to ramp up if uranium oxide spot prices hit US$50/lb.

With demand for nuclear rising, Macquarie forecasts a gradual price increase to US$53 per lb. through 2019, ultimately rising to US$60 per lb. over the long-term.

Additionally, the renewables genie cannot be put back into its bottle. Perhaps, like exponential technologies, renewables have not yet hit their full growth stride (much like the shale gas revolution in the U.S. seemingly took the world by storm). Although renewables currently account for only 3% of the global energy mix, that number is set to rise to 8% by 2035.

Notably, renewables’ share of power generation is expected to grow from 21% in 2012 to 33% by 2040, overtaking gas as the second-largest source of generation in the next few years and surpassing coal as the top source after 2035.

— Based in Toronto, Phil Hopwood a Partner with Deloitte Canada and leads Deloitte’s Global Mining group, heading a leadership team of over 40 mining professionals in all major geographies related to the resources sector. With over 27 years’ experience including work in the U.K. and Australia, his areas of expertise include performance improvement, operating model development, and value extraction from business transformation initiatives.

Deloitte is a professional services firm that provides audit, consulting, financial advisory, risk management, tax and related services to clients worldwide.

The above commentary represents a portion of one chapter in Deloitte’s newly released 48-page report entitled, “Tracking the trends 2016: the top 10 issues mining companies will face in the coming year.” For footnotes to this commentary and to view the full report, please visit www.deloitte.com.


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