Australia: The black coal sector – a look back and a look forward

WHO SHOULD READ THIS

  • Current and prospective producers of, and investors in, black coal exports from Australia;
  • Those seeking to understand likely medium term trends in coal supply and demand; and
  • Those seeking to shape policy and regulation for coal production in Australia.

THINGS YOU NEED TO KNOW

  • The International Energy Agency recently summed up the outlook for the Australian black coal export sector very well: "It benefits from a large high quality resource base (in particular low cost/high quality coking coal) and from a formidable mining industry which has successfully cut costs in recent years. Australia ... continues to be well-positioned to serve coal import needs in the Pacific Basin." Australia is well-positioned to grow its exports of both thermal coal and coking coal over the next two decades.

WHAT YOU NEED TO DO

  • While the export market outlook for Australian black coal is positive, coal project producers and investors in Australia need to work doubly hard at securing community support, especially for thermal coal projects, through rigorous environmental and social impact assessments and through respectful and transparent relationships with local landholders, townspeople and indigenous stakeholders.

2018 was a fascinating year of change and progress for Australia's black coal sector.

We have seen the arrival of some new and/or growing players who have demonstrated their confidence in the future of Australia's black coal export sector.  2018 saw strong prices, record export volumes and a forecast more than $20 billion contribution to the Queensland and New South Wales budgets from coal royalties over the next four years.  To cap it off, the latest World Energy Outlook published by the International Energy Agency points to growth in exports of Australian thermal and coking coal out to 2040, while describing the Australian coal mining sector as "formidable".

What the World Energy Outlook had to say

In a previous article (see  Global energy outlook – renewables switch but upside for Australian coal and gas) we reported that the International Energy Agency's 2018 World Energy Outlook (WEO) projected (under its core New Policies scenario) that Australia would boost its coal exports by 22 percent between 2017 and 2040. Reflecting expected coal power plant retirements in Australia, total coal production in Australia is expected to grow by a more modest 14 percent.

On an energy-adjusted basis, half of Australia's coal exports are expected to be coking coal, principally from Queensland's Bowen Basin.

Indeed, Australia emerges as the world's largest coal exporter. The WEO describes the outlook for the Australian black coal industry this way:

"It benefits from a large high quality resource base (in particular low cost/high quality coking coal) and from a formidable mining industry which has successfully cut costs in recent years. Australia ... continues to be well-positioned to serve coal import needs in the Pacific Basin."

This promising outlook for Australian coal is nevertheless expected to play out in a global context where overall coal demand is flat and coal's share of power generation keeps falling, from 38 percent to 26 percent and is expected to be overtaken by renewables (41 percent).

This outlook is a far cry from the IPCC's scenario of the near-elimination of coal power generation by 2050 as part of keeping warming to below 1.5 degrees (see  That Climate Change Report: What did it say, what does it mean?).  With so many new coal plants having been built in the past decade and still under construction, power generation is expected to be using nearly 3.4 billion tonnes of coal in 2040, which is 50 percent more coal than in 2000.

There is nevertheless a definite retreat from coal power, led by North America and Europe.

China is also expected to look to switch over time from coal power generation to gas and renewable energy in the quest for cleaner air. Indeed, coal use in China may have already peaked according to the WEO. That said, the expected Chinese coal demand of some 2.4 billion tonnes in 2040 is still 2.5 times higher than China's coal use in 2000.

The WEO also projects declining thermal coal use by Japan and Korea but concedes that the extent of the decline depends on a bigger share of power generation being claimed by nuclear power. Japan's latest energy plan provides for nuclear energy to supply 20-22 percent of Japan's power needs by 2030. However, in the seven years since the Fukushima disaster, only nine reactors have restarted in Japan. There are 39 operable reactors in Japan.

India's coal consumption is expected to grow by 120 percent out to 2040. Despite ambitious targets for increased domestic coal production, India is still expected to become the world's largest importer of coal, reflecting the "variable quality" of Indian coal, infrastructure constraints and a growing dependence on imports of coking coal.

While there seems to be an unchallenged positive outlook for Australian coking coal, there are uncertainties around the thermal coal outlook. For example, the WEO assumes that Indonesian coal exports retreat by over 40 percent by 2040 as more of their thermal coal is diverted to domestic power generation. The WEO cautions that "Indonesian exporters have shown they can mobilise production and exports rapidly when the market and price environments are favourable."

The WEO also reminds us that China was a net exporter of coal as recently as in the early 2000s. It therefore cautions that as domestic coal demand falls in China, we should not assume that the coal mining sector in China restructures at the same pace, pointing to the social stability complications in reducing mining employment. In that scenario, China could well again become a net exporter of coal as the sector adjusts to lower domestic coal demand, thereby "have far reaching implications for coal exporters."

On a more positive note, South East Asia's coal demand is expect to jump by 120 percent by 2040, with coal becoming the primary fuel for power generation. With the exception of Indonesia, that coal demand will have to be satisfied by imports. The WEO also points to the demand for imported coal from new coal plants being built in places like the UAE, Iran, Jordan and Egypt.

Australia will not have it all its own way in the traded coal sector. Russia for example is seen as having the potential to expand its market share. By the 2030s, Russia is expected to overtake Indonesia as the second largest coal exporter. Russia has advantages such as some of the lowest mining costs, depreciation of the rouble and investment into new mines and port infrastructure. The Russian coal sector has attracted investment from Japan and India.

All in all, the outlook for growth in demand for Australian coking coal seems to be indisputably positive. The WEO also says that the outlook for demand for Australian thermal coal "is consistent with some mining development in the Galilee Basin". Nevertheless, the generally positive outlook for Australian thermal coal exports could be impacted by greater than expected competition from Indonesia, Russia and even from China.

Where to from here?

The latest (December 2018) forecasts from the Office of the Chief Economist in the Federal Industry Department suggest a reasonably soft landing for coal prices over the next couple of years. The hard coking coal spot price was sitting comfortably above 200 USD/tonne during Februaryy 2019 and the Office of the Chief Economist is still forecasting a healthy average price out to 2020 of 145 USD/tonne. The spot price for Newcastle quality thermal coal in February has been in the range 90-100 USD/tonne and the Office of the Chief Economist is expecting an average spot price of 74 USD/tonne in 2020. Earnings in Australian dollars will of course be determined by what happens to exchange rates.

Queensland Treasury in their 2018-19 budget projections was counting on coal to deliver $12 billion in royalties over the next four years. Over the same period, NSW Treasury has included $7 billion in its forward estimates. In December, both states released their mid year budget reviews. Queensland upgraded its coal royalty estimate for 2018-19 by 20 percent to just under $4.3 billion and over the next four years expects coal to deliver $14 billion in royalties. NSW upgraded its royalty estimate for 2018-19 by nearly 12 per cent.

Investor interest, supply scarcity, coal quality and a healthy price outlook are coming together to produce a heightened interest in coking coal assets in Queensland. It also seems that the anti-coal NGOs are going to focus their resources into attempting to block new and expanding thermal coal projects. In introducing a Bill into the Queensland Parliament recently to ban coal mining in the Galilee Basin, a Greens MP spoke of phasing out mining of thermal coal. There was no mention of coking coal. Nevertheless, the WEO demonstrates that there is going to be a healthy demand for good quality thermal coal out of New South Wales and Queensland to supply fuel for the fleet of new coal-fired power stations in Asia.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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