Editorial

Coal's divergent footprints in the wake of COP21

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China's relaxing coal polices may affect US LNG exports & Asia's coal dependence. With the Paris Agreement ratified and nations across the world newly committed to reducing carbon emissions, it would seem that coal-based energy is facing its terminal decline. But the story isn't that simple. Coal price remains a major component of gas pricing in the US and Europe, as coal's ongoing competition with gas in the power sector continues to drive the gas price trajectory.

The three-legged stool: US LNG, European gas and Chinese coal

With US gas prices low and international market prices high, US LNG exporters can more easily cover their costs and keep exports moving. But with coal dynamics in flux worldwide, margins are at risk. Recent market movements have been favourable for these exporters as increased ARA coal prices have driven up European gas demand. As coal-to-gas switching becomes more prevalent across Europe, ramping up demand and creating the right circumstances for gas prices to rise, US LNG exporters are poised to benefit.

2016 thermal coal price history ($/t)

Enter China, who in September began to relax its 276-day-per-year operating maximum for coal mines, allowing select mines to ramp up production when prices rise. Could China overshoot its target as winter demand accelerates, deflating the market? And will that increased coal production lower European gas prices over the next year, challenging US LNG exporters?

Thermal coal in Japan and South Korea: unflappable or unsustainable?

While coal-to-gas switching has become more and more common across Europe, it remains elusive in Asia's biggest LNG markets — Japan and South Korea. Thermal coal, which has enjoyed a 40% price surge since March, has been one of the best-performing commodities this year, while the Asian gas and LNG market remains subdued.

LNG demand in Japan and South Korea is down year-on-year while coal continues to thrive. However, our latest analysis suggests that there have been periods throughout 2016 in which LNG was more competitive than coal, though coal's recent price rally has caused divergence once again.

Historical switching and fuel prices

As both countries face the daunting task of lowering carbon emissions to fulfil Paris Agreement goals, it remains challenging to foresee exactly how they will defy the robust coal market in favour of cleaner gas power.