CERAWeek 2014 - Global Coal: Divergent Paths

The global demand for coal is being driven by growing energy needs in the developing world. At the same time coal demand in North America is being constrained by cheaper unconventional gas and by climate policies. In Europe coal use has grown owing to the closing of nuclear power plants in Germany and the need for load generation. What are the competing forces influencing longer term demand and prices for coal around the world? What does this mean for coal markets and strategies?

Jim Thompson, Director, IHS Coal and IHS Coal Markets, chaired the Thursday morning Strategic Dialogue "Global Coal: Divergent Paths." Joining him were Howard Gatiss, Chief Executive Officer, Coal Marketing Company Ltd.; Benjamin Asher Jones, Manager Coal Acquisition, Tennessee Valley Authority (TVA); David Price, IHS Energy Senior Director; and James Stevenson, IHS Energy Director. The discussion focused on coal market trends in the United States and globally as well as some of the logistical challenges to meeting abrupt or short-term increases in coal demand. Strong growth for coal imports in major coal markets such as the United States, Europe, and China is unlikely in the future, but other countries in Asia as well as Morocco and Turkey have notable growth potential.

Mr. Stevenson offered an overview of current and longer-term coal market trends for the United States. Coal inventories at US power plants and natural gas storage inventories have both been drawn down significantly this year in response to the cold weather. The need to reinject natural gas into storage later in the year will force coal plants to run harder to make up for the loss in gas generation. But coal price signals have yet to reflect this issue and are not encouraging a ramp-up in coal production. In the long term, he said, IHS expects a long, slow decline in the consumption of US coals. There is a growth story for US coal exports to Asia, but this export growth will not be as big as the decline in domestic consumption. In aggregate, US exports are expected to be "holding fairly steady" but with growth varied across coal basins.

Mr. Price told the audience that the international coal market is "not a pretty story at the moment," as the market is currently oversupplied. Price increases around 2011 encouraged producers to build out capacity, but the demand is not there anymore. The long-term price outlooks are similarly not very hopeful, as many large markets plan to reduce reliance on coal consumption. However, there are some areas of future demand growth, particularly in Asia. Coal is generally the most economic option for power generation projects in Asia, as natural gas prices in the region are typically around $10-15 per million Btu (MMBtu) while coal is around $3-5 per MMBtu. The retirement of many nuclear plants in Japan following the Fukushima accident will allow coal demand to remain robust in that country. India is likely to have "substantial" yet "erratic" growth in coal consumption as well. Morocco and Turkey also have growth potential. China, however, has significant domestic coal supply and is gradually reducing its reliance on coal consumption in large part because of environmental concerns. On the supply side, Mr. Price said, the coal supply curve is long and flat. There is plenty of coal, but costs will likely rise, he said, citing Australia as an example. He also mentioned that there is an oversupply of freight capacity, as shipping capacity ordered a few years ago is still coming online. However, freight costs will likely increase because of an eventual switch to cleaner-burning fuels for ship engines.

In response to a question about coal transportation challenges, Mr. Jones said that utilities need to create flexibility in their fuel contracts. As a coal buyer, he said, his company "worries about the stress test on the system" -how to ensure reliable fuel supply. Rail carriers are limited in how quickly they can respond to abrupt increases in demand, so TVA relies heavily on inventories but also works with producers and transporters when supply becomes tight. Mr. Jones noted that the capacity for coal transportation in the United States competes with that of other fuels such as crude oil from the Bakken. There is significant concern regarding short-term flexibility in transportation, but long-term issues are less problematic.

Mr. Gatiss said there is not much slack in coal supply in international markets. He said one approach his company takes in the beginning of each year is to set aside some coal for spot purchases in the market, typically from customers in Europe and Turkey. In general, coal in the international market will be available but not in a steady flow; he said it is not like "turning on the tap," so whether coal can be available for upticks in demand really depends on timing and coordination with producers and transporters.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.