China remains a key coal market

Updated: 2013-04-02 10:41

By Michael Barris in New York (China Daily)

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China remains a key coal market

Deck hands walk along barges as the American Electric Power Co's AEP Leader towboat makes its way along the Ohio River with 30,000 tons of coal. The US is a major supplier of coal to China. Ty Wright / Bloomberg

The US coal industry shouldn't continue to count on China as a major export market, according to a private research firm's recent report whose findings are drawing criticism and skepticism.

The study by Englewood, Colorado-based research firm IHS CERA predicts that Chinese coal imports will peak and then slip into a "prolonged" decline as moderating demand combines with increased domestic production.

"Many companies that have targeted China as their strategic supply region in the long term may need to rethink that strategy," Xiaomin Liu, IHS CERA's associate director in Beijing, said. "Some international suppliers will be able to compete effectively, but others will struggle to find a competitive edge as China's market becomes ever more liquid."

China is the third-largest destination for US coal exports, trailing only the Netherlands and the United Kingdom. By 2012, Chinese coal imports from the US totaled 9.3 million tons, compared with global US coal exports of more than 120 million tons.

The study's findings come as US coal is buffeted by a demand drop at home that has crimped profit and seen some producers shutter mines. Despite its popularity abroad, coal is finding it tough to compete with cheaper natural gas. Carbon dioxide emission restrictions on new power plants have in turn curtailed construction of new coal-fired plants, increasing the appeal of natural gas for power producers.

Luke Popovich, a spokesman for the National Mining Association in Washington, disputed IHS's conclusions.

"We haven't seen any evidence that would lead us to conclude that China will be anything but a large consumer of coal which, as long ago as 2009, exhausted its own production," Popovich said in an interview. China, he added, will "increasingly have to turn to imports to meet a certain proportion of its annual consumption for energy".

While acknowledging that "the market has softened", Popovich said the "growing wealth" of China's middle class "implies there will be greater demand for electricity". So "we don't see where the energy is going to come from (in China), to displace coal as the primary fuel to satisfy that electricity demand."

Kevin Tu, director of the China Energy and Climate Program at the Carnegie Endowment for International Peace in Washington, also questioned the IHS study's findings, saying that "predicting the future is a tricky business".

"In 2012, Chinese coal imports increased by 59 percent on an year-over-year basis, reaching 290 million tons", Tu said. "While coal exports this year are widely expected to peak again, it is rather difficult to foresee future demand for US coal as uncertainties are too high. Nevertheless, if China were to reduce its need for US coal, the long-term prospects of the US coal mining industry would be pretty dim as there is no alternative coal export destination as promising as China."

IHS's study, Coal Rush: The Future of China's Coal Market, analyzed China's current coal, demand and logistics. Its researchers examined "all aspects" of the coal market structure in China, including coal resources, production trends, production cost and coal quality at the national, regional and field levels.

IHS noted that China's recent dramatic growth in coal imports would be "short lived" due to moderating economic growth and fuel diversification. Raw coal demand, the study said, should peak around 2025 at about 5.1 billion tons, up from 3.7 billion in 2011 - as the average growth rate slows to 2.4 percent from the 10 percent seen over the past decade. Steam coal demand is expected to peak around 2027 at about 4.3 billion tons, before gradually declining.

The study also noted that China is on track to launch its own shale-gas production in the early 2020s. "Substantial fuel-switching in key coal-consuming sectors, such as power, could occur as natural gas supplies come online," said Xizhou Zhou, director of IHS CERA in China.

Popovich dismissed claims that China would turn to natural gas. "That's going to take years to develop, even if they did have the technology and put their investment behind it," he said. "That is not something that can be started up quickly."

David L. Kanagy, executive director of the Society for Mining, Metallurgy and Exploration Inc in Englewood, Colorado, said his organization "thinks coal will still be an economical fuel for China in the near future. Also given the swings in price per Btu for natural gas and coal, it is likely that as natural gas usage increases the cost will increase, thus bringing energy production for coal more in line with natural gas," Kanagy said. "Prices will moderate over time and the competitive advantage of natural gas will become thinner with that of coal."