LONDON, 6 September 2016 – A new report by Wood Mackenzie shows a 40% fall in trade in thermal coal if the temperature of the world rises by only 2 degrees Celsius. This timely study follows the US and China formally ratifying the COP21 Paris climate agreement over the weekend at the G20 summit in China. Wood Mackenzie believes the reduction in trade in thermal coal, from an estimated 900 million tonnes for 2016 to 527 million tonnes by 2035, will also likely lead to unintended consequences for prices if market consolidation occurs.
Prakash Sharma, research director of global coal markets for Wood Mackenzie, says: "Putting things into context for thermal coal trade, Wood Mackenzie's proprietary modelling suggests seaborne import demand to shrink by 40% by 2035. Asia, Europe and the Americas will import 433, 80 and 15 million tonnes, respectively, in 2035 from 673, 170 and 39 million, respectively, estimated for 2016."
Sharma continues, “Although the impact on prices is hard to predict in a carbon-constrained world, they will undoubtedly will be lower. Wood Mackenzie's modelling suggests a sub US$50 per tonne FOB Newcastle (real terms) benchmark pricing post-2020. However, the market may well consolidate which could result in producers having more power over prices. Other factors such as a global price on carbon and greater demand for premium thermal coal could sharply increase supply costs which could also lead to higher prices.”
Wood Mackenzie’s analysis of the IEA 450 Scenario also shows:
- A 2 degree Celsius limit on temperature rise would mean a sharp reduction in the share of coal-fired generation from 41% in 2013 to 16% by 2035,
- Australia would be impacted less than most of its competitors due to higher quality of its coal – but would still see exports decline by 35% by 2035 from current levels,
- Prices would likely fall significantly and stay below real US$50 per tonne long-term, and the industry could undergo a massive consolidation
The IEA 450 Scenario for 2035 is based on massive improvements in energy efficiency and an increased share of nuclear, renewables and gas in supplying power. The IEA 450 Scenario assumes that carbon capture and storage will become commercial post-2020 and will potentially support 980 million tonnes thermal coal consumption in 2035. Without this technology breakthrough, the Scenario would appear more severe on thermal coal demand.
The IEA 450 Scenario presents a bearish coal import outlook for Japan, South Korea, Taiwan and Southeast Asia, where domestic reserves are either non-existent or exhausting. China and India have options to support domestic coal industry and restrict imports.
"Our analysis suggests demand for high-energy bituminous coals will be more resilient compared with low energy lignite-type coals. As a result, we expect Australian exports to fall more slowly than the rest. Australian exports will decline from 210 million tonnes in 2016 to 135 by 2035. In comparison, Indonesian exports will decline from 340 million tonnes in 2016 to 193 by 2035. Colombia, Russia and South Africa combined will export less than Australia in 2035," Sharma explains.
Sharma concludes: "Thermal coal trade in a 2 degrees Celsius world looks very challenging. Many unintended consequences for energy supply security, power generation costs and fuel prices may emerge that have not yet been evaluated nor integrated in corporate strategies and governmental plans despite the two major nation's formal ratification over the weekend."
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Wood Mackenzie's analysis:
Wood Mackenzie's reports: "Global thermal coal long-term outlook H1 2016" and "Thermal coal in a carbon-conscious world: the IEA 450 Scenario" are available to purchase on our On Demand ecommerce website.