Coal is far from being written off as a source of energy in the future. In 1971 coal contributed 1440 mtoe of energy accounting for 25.5 percent of the global energy pie. In 2009 coal contributed 3684 mtoe of energy accounting for 28.8 percent of the global energy pie. In contrast, oil which contributed 2552 mtoe of energy in 1971 accounting for 45.1 percent of the global energy pie contributed 4066 mtoe of energy accounting for only 31.8 percent of the global energy pie by 2009. In the last four decades coal’s contribution to the global energy pie has grown by nearly 79 percent compared to 59 percent for oil.
In 2009 China became a net importer of coal for the first time with a record breaking 126 million tonne (mt) import accounting for over 15 percent of all globally traded coal. By the first quarter of 2010 even Columbia and USA were exporting coal to China. In 2011 China sourced more than 182 mt of coal from overseas suppliers and overtook Japan as the world’s top importer. Has the ’china factor’ contributed to a structural shift in the global coal market? Most the world seems to think so.
The idea of energy security which was hitherto rooted in the supply and price of oil has now been expanded to include concerns over the availability and trade of coal. The key concern is the growth of coal demand from China and its impact on the price and availability of globally traded coal given the level of concentration in sources of supply. The IEA which chides itself for having taken so long to bring out a report on coal notes, in its Coal Market Report 2011 that more than 80 percent of global coal exports come from just six countries, Australia, Indonesia, Russia, USA, South Africa and Columbia with 40 percent of total exports controlled by just 9 companies.
China’s presence in the coal market is bigger than that of any other country for any other fuel. China was responsible for nearly half the global coal production and consumption in 2009 and China is projected to account for over half the global coal demand growth even if China implements is ambitious 12th Five Year Plan that aims to reduce energy and carbon emission intensity through enhanced energy efficiency measures. India, the second largest coal consumer is expected double its coal use by 2035 and overtake the United States as the world’s second largest coal consumer by 2025 and become the largest coal importer by 2020. Over 60 percent of India’s increase in coal demand is expected to come from power generation.
The coal market is increasingly global in the sense that South African, Russian or Columbian coal producers can change their export destinations from the Atlantic to the Pacific basin depending on which is more attractive. When Chinese utilities emerge with the largest premiums, coal will flow towards China from around the world. Paper trade based on API 2 the benchmark price reference for imported coal in North-west Europe and the primary reference for coal trading in Europe is now ten times the value of physical trading which gives rise to the possibility of financial speculation driving prices rather than fundaments which makes the global goal market similar to the oil market.
Though there is broad consensus on the fact that China will remain a net importer, a model based study by MIT concluded that China will remain a ’cost-minimiser’ and could be both a buyer and seller in the global market as key price relationships fluctuate. China’s coal reserves are concentrated in the North and West of China while demand is concentrated in Northern and Southern costal markets. Northern coastal markets are served by a network of truck and rail routes but the rail and truck capacity to serve the Southeastern markets are prohibitively expensive. Therefore coal supply for Southeast China is supplemented with costal shipping routes from Eastern ports. Coal buyers from Southeast China can therefore choose between domestic coal delivered by sea or buy international coal depending on which is cheaper. This arbitrage opportunity allows Chinese coal buyers to take advantage of price differentials between domestic Chinese and international coal prices. Though the MIT model did not differentiate between thermal and coking coal and also did not factor in technical limitations such as boiler design that set limitations on how much imported coal can be used in the domestic market, the conclusions of the study are in broad agreement with reality.
Until 2009, the price differentials between domestic and imported coal in China favoured domestic coal. In 2008, CIF price for Australian and Russian coal was higher by about $ 65 / tonne compared to Chinese domestic coal. With the onset of the global recession by the end of 2008, Indonesian coal was cheaper than Chinese coal by $ 40/tonne and Australian coal was cheaper by $ 29/tonne. Even Russian was coal was cheaper than Chinese domestic coal in coastal markets despite the huge distance disadvantage. This huge arbitrage opportunity arose because the macroeconomic impact of the global financial crisis was comparatively smaller on China and other developing countries. Moreover, a series of regulatory measures such as mine consolidation, implementation of safety standards along with a simultaneous break down in agreement between coal producers and power generators over prices drove up prices. China also has in place a policy of ’Two Markets, Two Resources’ that encourages coal users to import coal when economics justifies it.
Chinese trade behaviour is thus fundamentally different from that of India which is structurally short of coal. The ’China Factor’ has not essentially contributed to a structural shift in the market with China emerging as net importer. Instead it has introduced a large element of uncertainty in the market with China acting as the world’s largest coal arbitrager. The international market for coal is now more sensitive to developments in the margin such as variations in China’s very large volumes of coal production and demand which will determine its net trade position. Sadly, India which is already battling multiple forces that threaten its energy security has to come to terms with the fact that the price of coal it buys in the international market and the price of power paid by an average customer in India is likely to be inextricably linked to what happens in the coal mines of inner China.
(Lydia Powell is a Senior Fellow at the Centre for Resource Management, Observer Research Foundation)
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