Study links 2˚C rise in global temperature to 40% fall in thermal coal trade

8th September 2016

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

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VANCOUVER (miningweekly.com) – A 2 ˚C rise in global temperatures could result in a 40% reduction in global thermal coal trade by 2035, new analysis by Wood Mackenzie (WoodMac) has found.

According to WoodMac, 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, the commercial intelligence firm advised.

The report follows the US and China formally ratifying the COP21 Paris climate agreement over the weekend at the G20 summit in China.

"Putting things into context for thermal coal trade, Wood Mackenzie's proprietary modelling suggests that seaborne import demand will 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 tonnes, respectively, estimated for 2016,” stated research director of global coal markets Prakash Sharma.

According to Sharma the impact on prices is hard to predict in a carbon-constrained world. However, they will undoubtedly be lower.

WoodMac's modelling suggests a sub $50/t free-on-board 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.

450 SCENARIO
According to WoodMac's analysis of the International Energy Agency (IEA) 450 Scenario, a 2 °C limit on temperature rise would mean a sharp reduction in the share of coal-fired generation from 41% in 2013, to 16% by 2035. The 450 Scenario sets out an energy pathway consistent with the goal of limiting the global increase in temperature above preindustrial levels to 2 °C by limiting concentration of greenhouse gases in the atmosphere to around 450 parts per million of CO2.

WoodMac noted that Australia would be impacted less than most of its competitors, owing to the higher quality of its coal. However, it would still see exports decline 35% by 2035 from current levels.

The consulting firm also revealed that prices would likely fall significantly and stay below real $50/t in the long term. The industry could also undergo a massive consolidation as a result.

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 scenario assumes that carbon capture and storage will become commercial from 2020 onwards and will potentially support 980-million tonnes of thermal coal consumption in 2035. WoodMac notes that, without this technology breakthrough, the scenario would appear more severe on thermal coal demand.

Meanwhile, the IEA 450 Scenario presents a bearish coal import outlook for Japan, South Korea, Taiwan and South-East Asia, where domestic reserves are either nonexistent or being exhausted. China and India have options to support domestic coal industry and to 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-million tonnes by 2035," Sharma explained.

In comparison, Indonesian exports will decline from 340-million tonnes in 2016, to 193-million by 2035. Colombia, Russia and South Africa combined will export less than Australia in 2035.

"Thermal coal trade in a 2 ˚C 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,” Sharma cautioned.

Edited by Samantha Herbst
Creamer Media Deputy Editor

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