Resources and Energy Quarterly March quarter 2012

Thermal coal

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  Thermal coal prices are projected to decline gradually over the outlook period, but are nevertheless expected to remain relatively high in historical terms.
  
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  Over the outlook period, thermal coal imports are expected to be supported by growth in demand in the Asian region. Thermal coal imports will continue to be supported by new coal-fired power plants and government initiatives to increase electrification within a number of emerging economies. By 2017, world trade of thermal coal is projected to be 1040 million tonnes.
  
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  Mine and infrastructure capacity expansions in Australia, Indonesia, Colombia and South Africa will support an increase in thermal coal exports while the emergence of exports from Mozambique and Mongolia will also contribute to international trade over the outlook period.
  
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  Australia’s export volumes of thermal coal are projected to grow at an average annual rate of 11 per cent over the outlook period to total 269 million tonnes by 2016–17. Australia’s export values are projected to total $18.8 billion (in 2011–12 dollars) by the same year.
  

For much of 2011, thermal coal spot prices traded between US$115 and US$125 a tonne. Prices softened towards the final quarter of 2011 reflecting a slower demand growth in importing economies that coincided with increased exports from a number of key exporting countries. For 2011 as a whole, spot prices averaged around US$122 a tonne. In 2012, thermal coal spot prices are forecast to ease to around US$115 a tonne due to increased supply from Australia and Indonesia.

For Japanese Fiscal Year 2012-2013 (JFY, April 2012 to March 2013), thermal coal contract prices are assumed to settle at around US$115 a tonne. This would represent an 13 per cent lower price than the JFY 2011 contract prices which settled at around US$130 a tonne. The decrease in prices reflects a combination of factors including lower growth in import demand in several major importing economies and an increase in exports from large exporters such as Australia and Indonesia.

…but declining over the medium term although still remaining high in historical terms

Over JFY 2013 to JFY 2017, thermal coal contract prices are assumed to gradually decline, reaching US$82 a tonne (in 2012 dollars), by JFY 2017. Despite the decline, thermal coal prices are projected to remain above historical averages (see Figure 1). The decrease in prices reflects strong growth in exports from Australia, Indonesia and Colombia and emerging exporters such as Mongolia and Mozambique.

The projected decrease in prices is expected to be limited by production costs, which have increased significantly over the past decade. Production costs are expected to continue to increase as companies extract coal deposits that are deeper underground and further away from existing infrastructure. In addition, the costs of many inputs such as diesel, labour, explosives and machinery are also expected to increase. Higher unit costs also reflect the increased capital costs associated with project construction.

Over the outlook period world thermal coal imports are projected to increase at an average rate of 4 per cent a year to reach 1040 million tonnes by 2017. The majority of growth is projected to occur in Asia, underpinned by strong import growth in non-OECD Asia, particularly China and India (see Figure 2). As economies in emerging Asia grow and per capita income increases, a significant proportion of increased electricity demand is expected to be supplied by coal-fired power stations. This is because coal remains a cheap form of energy for base load electricity generation and is geographically widely available.

Gas, nuclear and renewable electricity generation is expected to increase throughout non-OECD Asia, however, it will still only account for a relatively small share of the total electricity generation in 2017. By contrast, thermal coal imports into OECD markets such as Japan and Europe are projected to remain relatively flat, due to relatively limited growth in electricity demand associated with assumed weaker economic growth over the short term and increases in energy efficiency over the outlook period. In the OECD, the share of electricity generated from coal is expected to decrease as government policies encourage the use of gas and renewable energy.

Figure 2: Major thermal coal importers

Please refer to page 51 of the Resources and Energy Quarterly – March quarter 2012 PDF version.

…underpinned by China…

In 2011, China’s thermal coal imports are estimated to have totalled 139 million tonnes, an increase of 8 per cent from 2010. The strong growth witnessed in China’s imports since 2009 reflects an inability of China’s domestic coal producers to meet increased domestic demand. It also reflects the competitiveness of imported coal, as domestic transportation and mining costs are high.

In 2012, China’s thermal coal imports are forecast to increase by 4 per cent to 145 million tonnes. The lower rate of growth in imports relative to 2011 reflects lower growth in electricity generation associated with assumed weaker economic growth and a decision to cap domestic coal prices, which should make domestic coal more competitive relative to imports. However, thermal coal imports are still forecast to increase given continued constraints on China’s domestic coal infrastructure that will limit the quantity of coal that can be moved from the north and west of the country to the major consuming regions in the east.

Over the medium term, China’s thermal coal imports are projected to continue increasing in line with trends seen over the past three years. The increase in imports reflects projected strong growth in domestic demand that will outpace growth in domestic production. Robust growth in China’s coal consumption will be underpinned by increases in electricity demand associated with rapid economic growth. A significant proportion of increased electricity generation is expected to come from coal-fired plants, with increased generation from gas, nuclear and renewable energy sources making up the difference.

While China is the world’s largest coal producer and its production will increase over the medium term, increases in domestic supply are expected to be limited by high mining and transportation costs. Increases in mining costs are associated with new coal deposits that are at greater distances from existing infrastructure and further below the surface than previously mined deposits. An increased focus on the environment and safety is also expected place upward pressure on mining costs due to compliance.

Transport costs are expected to increase as mining movies further into China’s western provinces, which are further away from large consuming centres on the southeast coast. As a result coal imported into China’s south eastern coastal region will continue to be competitive against coal transported from China’s northern and western production regions. Accordingly, China’s thermal coal imports are projected to increase at an annual average growth rate of 3 per cent to reach 166 million tonnes by 2017.

China’s coal exports have declined rapidly from around 81 million tonnes in 2004 to an estimated 13 million tonnes in 2011. The fall in exports reflects strong domestic demand and policies aimed at ensuring sufficient supply for domestic consumers. Over the outlook period, China’s exports are projected to decline gradually to total 11 million tonnes by 2017, reflecting strong domestic demand and weaker import demand in north Asia.

…and strong growth in India

India is expected to remain one of the fastest growing consumers and importers of thermal coal over the outlook period. Imports are projected to increase at an annual average rate of 11 per cent, growing from around 78 million tonnes in 2011 to reach 148 million tonnes in 2017. India will continue to rely heavily on thermal coal imports from Indonesia over the outlook period, with further support in imports from South Africa and Australia. Like China, India’s growth in thermal coal imports reflects strong growth in domestic consumption which is not expected to be matched by increases in domestic production.

A rise in India’s thermal coal consumption is expected to be underpinned by the planned expansion of coal-fired electricity generation capacity to support rising electricity demand. The Ministry of Power identified gaps in electricity supply and outlined a plan for higher rates of electrification across India. This has resulted in the planning and construction of a number of power stations which are scheduled to start up over the outlook period.

One of the initiatives was to increase the amount of electricity generated from both private power stations and government funded Ultra Mega Power Projects (UMPPs)—power stations with a generation capacity of 4000 megawatts. There are four UMMPs either under construction or in the final stages of planning (see Table 1) and together these power stations could burn up to 16 million tonnes a year of coal. In addition, there are a number of smaller coal-fired power stations under construction that will contribute to India’s growth in thermal coal consumption.

The expected increase in India’s thermal coal imports is, in part, due to a number of new power stations that will rely on imported coal. While India is the world is third largest producer of coal, growth in production over the outlook period is not expected to be sufficient to meet consumption increases. There is uncertainty about the rate at which India’s coal production will increase given the lengthy approval process for the development of new mines. Many of the delays relate to getting environmental approvals and negotiating agreements with local land holders. Further, much of India’s coal reserves are of a poor quality, with low calorific values and high sulphur contents. Imported coal is often used to blend with domestically produced coal to increase the energy output of coal consumption and to improve the quality of emissions. In addition, a number of the power stations are located in India’s heavily populated regions and distant from coal mines, which are mostly located in the centre of the country. Inefficient transport networks can make it costly, and possibly uneconomic, to move coal around the country. This, in turn, tends to make imports more attractive to coal consumers.

The March 2011 earthquakes and tsunami of the east coast of Japan had a significant impact on the power generation mix and generation capacity within Japan. These effects could last for the duration of the outlook period. In addition to nuclear power facilities, a number of coal-fired power stations were damaged by the earthquakes and tsunami. The immediate shutdown of some coal fired electricity generation resulted in Japan’s thermal coal imports in 2011 decreasing by an estimated 3 per cent relative to 2010 to 125 million tonnes. In 2012, Japan’s thermal coal imports are forecast to increase by 2 per cent to 128 million tonnes under the assumption that a restart of some of the damaged thermal power stations will result in increased imports. Increased economic activity associated with the reconstruction of damaged regions is also expected to support thermal coal imports in 2012.

In 2013 and over the remainder of the outlook period, Japan’s thermal coal imports are forecast to remain more or less unchanged at around 129 million tonnes. At this level of imports, Japan’s coal-fired electricity generation would be operating at or near full capacity. Accordingly, any increases in thermal coal imports beyond 129 million tonnes would be dependant on expansions to coal-fired electricity generation capacity. The outlook for Japan’s thermal coal imports is based on the assumption that there will be no significant such additions over the outlook period. There is a possibility that an upcoming review of Japan’s energy sector may encourage the construction of new coal-fired capacity, particularly if it is recommended nuclear capacity is shut down for an extended period. If this happened, Japan’s thermal coal imports could increase beyond 129 million tonnes the outlook period.

In 2011, the Republic of Korea’s thermal coal imports increased by 7 per cent, relative to 2010, to 97 million tonnes as growth in electricity demand was met by increased output from recently commissioned and existing coal-fired power stations. In 2012 and 2013, thermal coal imports are forecast to increase by 3 per cent and 2 per cent, respectively, to reach 102 million tonnes in 2013. Over the remainder of the outlook period (2014 to 2017), at least 2000 megawatts of new coal-fired electricity generation capacity is scheduled to be commissioned. The new capacity is expected to support thermal coal imports that are projected to increase at an annual average growth rate of 2 per cent between 2014 and 2017 to reach 112 million tonnes.

In 2011, European Union (EU) coal imports are estimated to have increased by 7 per cent, relative to 2010, to 160 million tonnes. The increase in imports was underpinned by increased imports to the UK, where thermal coal imports grew by around 50 per cent from the previous year to around 30 million tonnes, primarily because of disruptions to gas supplies from the North Sea and a rebuilding of coal stocks. In Germany, thermal coal imports increased from 2010 to total around 39 million tonnes, underpinned by higher electricity usage. In 2012, thermal coal imports are forecast to decrease by 3 per cent from 2011 to 156 million tonnes as weak economic growth across the region and the availability of gas for electricity generation limit growth in coal-fired electricity generation and, hence, thermal coal imports.

Over the years 2013 to 2017, thermal coal imports into the EU are projected to increase at an annual growth rate of 2 per cent to total 168 million tonnes by 2017. Growth in coal imports into Germany is expected to offset lower imports into Southern European economies. In Germany, there has been a shift in its energy generation mix which has seen older nuclear power facilities shut down and legislation enacted to shut all nuclear facilities by 2022. The loss of nuclear power generation is expected to be replaced by a combination of new coal-fired power plants and renewable energy. In other parts of Europe, such as Spain, Portugal and Italy, projected lower coal consumption and imports are due to assumed weak economic growth over the outlook period and the increasing share of renewable energy in their electricity generation mix.

Over the next 8 years Germany could gradually add net coal-fired generation capacity of around 10000 megawatts. This net figure incorporates the closure of a number ageing power plants. New coal-fired power generation is expected to support imports, particularly given the decline of Germany’s domestic coal production. The German Government has announced a target to close all of its hard coal production by 2018. If this eventuates all of Germany’s black coal consumption will need to be sourced from imports.

Global supply to increase over the medium term

Over the outlook period growth in the world thermal coal trade is projected to be supported by higher exports from Australia, Indonesia, Colombia and South Africa (see Figure 3). Mine, port and rail expansion plans are well underway in these countries to support an increase in exports.

In 2011, Australia’s thermal coal exports increased by 4 per cent, compared with 2010, to total 148 million tonnes. This increase was supported by recently completed projects such as Xstrata’s Mangoola mine (annual capacity of 8 million tonnes), stage 1 of Yancoal’s Moolarben mine (8 million tonnes), and the expansion of the BHP Billiton’s Mount Arthur North open-cut mine (additional 3.5 million tonnes).

In 2012, Australia’s coal exports are forecast to increase by 10 per cent to 162 million tonnes. Underpinning this growth will be projects scheduled for completion in 2012, including Rio Tinto and Mitsubishi’s Hunter Valley Operations Expansion, Xstrata’s Ravensworth North and Narrabri Coal Project (stage 2). Increased mine production capacity will also be supported by recently completed infrastructure projects, including Port Waratah Coal Services’ Kooragang Island Coal Terminal expansion (11 million tonnes a year), the X50 expansion at Abbot Point (additional 25 million tonnes). Supporting these infrastructure expansions is higher throughput at the Newcastle Coal Infrastructure Group Coal Terminal.

Between 2013 and 2017, Australia’s thermal coal exports are projected to grow at an average annual rate of 11 per cent to total 269 million tonnes by 2017. Encouraged by sustained high prices and strong demand, a number of mining companies are scheduled to commission new projects over the latter years of the outlook period. The majority of these projects will be in New South Wales. For example, Xstrata’s Ulan West (annual capacity of 7 million tonnes), BHP Billiton’s Mount Arthur (4 million tonnes a year run-of-mine) and Idemitsu Kosan’s Boggabri open-cut mine (3.3 million tonnes) are all scheduled to commence production by 2014. In addition, it is assumed that expansions to the Ensham Resources’ underground mine in Queensland will contribute to increased production and exports over the medium term.

Additional mine production will be supported by expansions to infrastructure capacity. Capacity at Newcastle Coal Infrastructure Group Coal Terminal is scheduled to increase through the addition of stage 2 (additional capacity of 23 million tonnes a) and stage 3 (additional 13 million tonnes) that will commence in 2013 and 2014. A number of rail projects in the Hunter Valley that are either under construction or at an advanced stage of planning will complement increased mine and port capacity. In Queensland, a number of port and rail projects are likely to start operation within the outlook period which will also increase export capacity. These include stage 1 of the Wiggins Island Coal Terminal and the associated rail project, and expansions at Abbot Point and the Goonyella to Abbot Point rail expansion and the Surat Basin Rail project.

The Galilee Basin, located in Queensland, contains vast deposits of thermal coal. While a number of mining projects in the Basin are progressing towards a final investment decision, there are a number of challenges to project development and operation. These include the design of port and rail infrastructure and negotiations and possible agreements with other project owners on infrastructure access. Before a final investment decision can be taken, off-take agreements with customers may need to be finalised as well as securing funding for the multi-billion dollar development costs. While the Galilee Basin is expected to become an important coal producing region, significant exports from this region are not expected to occur until after 2017.

In 2011, Indonesia’s thermal coal exports are estimated to have increased by 6 per cent, relative to 2010, to total 302 million tonnes. The increase in exports reflects strong demand from China and India and favourable weather conditions in the second-half of 2011 which supported higher rates of production and exports. Indonesia’s thermal coal exports in 2012 are forecast to increase by a further 3 per cent to 310 million tonnes, underpinned by continued growth in exports to China and India and additional expansions to domestic production and infrastructure capacity.

Over the medium term, Indonesia’s thermal coal exports are projected to continue increasing despite expected growth in domestic coal consumption. Indonesia continues to have frequent electricity shortages and in response, Indonesia’s state run power generator Perusahaan Listrik Negara (PLN) plans to increase its coal fired generation capacity. PLN’s target is to add an additional 10 Gigawatts of electricity generation capacity by 2014, with a large portion to be from coal-fired power stations. To ensure these and other power stations have adequate access to coal, Indonesia has legislation in place that requires domestic coal producers to sell up to 25 per cent of their production to domestic consumers. However, despite the increase in demand from domestic consumers, Indonesia’s coal production is projected to increase in order to supply both domestic and export markets.

Growth in production and export capacity will be supported by expansions at a number of Indonesia’s largest companies, including at Kaltim Prima Coal and Arutmin where combined capacity is expected to reach 100 million tonnes by 2013. Expansions to relatively smaller mines including the Fajar Bumi Sakti (FBS) and the Pendopo mines are also expected to contribute to an increase in Indonesia’s production and exports.

In addition to mine capacity expansions, Indonesia’s largest coal miners are also investing in infrastructure and process improvements to boost their exports. For example, PT Adaro has invested in additional barge loaders at South Kelanis located near the Kelanis River Terminal, through which about 50 million tonnes of coal are transported. The additional barges are expected to improve efficiency, lower costs and also support PT Adaro’s expansion plans to increase production to 80 million tonnes a year.

Reflecting these developments, Indonesia’s coal exports are projected to increase at an average annual rate of 3 per cent a year from 2013 to reach 351 million tonnes by 2017.

In 2011, Colombia’s thermal coal exports are estimated to have increased by 9 per cent, relative to 2010, to total 75 million tonnes. The rise in exports largely reflects a significant increase in exports into Asia which was facilitated by low freight rates throughout 2011. In 2012 and 2013, Colombia’s thermal coal exports are forecast to increase, underpinned by capacity expansions at the La Guajira and César mining regions.

Beyond 2013, Colombia’s thermal coal exports are projected to increase at an average annual rate of 5 per cent to total 97 million tonnes by 2017. The increase in exports will be supported by planned investment to expand production at the Cerrejon mine and also at the César coal region from producers such as Drummond, Glencore and Vale. The scheduled expansions to infrastructure, including a second berth at Puerto Bolivar by 2015, would support an increase in Colombia’s exports. Much of the growth in Colombia’s coal exports will need to be sold into Asia given the projected weak import demand growth in its traditional export markets of Europe and the US. Support for increased Colombian coal exports to Asia is supported by its desirable characteristics such as high calorific values and low sulphur content. A drive to diversify supply by some Asian countries will also support Colombia’s coal exports as will current relatively low freight rates.

South Africa’s thermal coal exports in 2011 were estimated to be around 66 million tonnes, a decrease of 3 per cent from 2010. The decline in exports was partly attributable to limitations in infrastructure to support exports, and weather related disruptions in the first-half of 2011. In 2012 and 2013, thermal coal exports from South Africa are expected to increase by 3 per cent and 4 per cent each year to total 71 million tonnes in 2013. The growth in exports will be supported by gradual improvements to the efficiency of the infrastructure network, including increased capacity of the rail line to the Richards Bay Coal Terminal.

Over 2014 to 2017, South Africa’s exports are projected to increase by around 3 per cent a year, reaching 81 million tonnes by 2017. The growth will be supported by an increase in production at Xstrata’s and Anglo American’s operations. However, there are a number of challenges to increasing exports for South African producers including energy supply disruptions at mine sites and infrastructure bottlenecks, particularly along the Richards Bay Coal Terminal rail line. In addition, increasing domestic demand could limit the availability of coal for export.

Exports from the US to decline in 2012

In 2011, thermal coal exports from the US increased by 36 per cent from 2010 to total 31 million tonnes. The rise in exports was underpinned by increased import demand from Europe and Asia. Additionally, weak domestic demand in the US freed up coal to be sold into export markets.

In 2012, US thermal coal exports are forecast to decrease by 11 per cent, relative to 2011, to total 28 million tonnes, reflecting weaker demand from its largest market, Western Europe.

Over the remainder of the outlook period (2013 to 2017), US exports are projected to increase to around 33 million tonnes a year. Exports from the US are supported by weak domestic demand for thermal coal associated with low domestic gas prices and an associated increase in use of gas fired electricity generation. There are also plans to upgrade export infrastructure on the eastern and Gulf Coasts to enable production that was previously destined for domestic markets to be exported. There are further upside risks to US exports, with preliminary plans in place to export coal from the north west of the country to importers in the Asia-Pacific region. Low cost and low energy content coal would be sourced from the Powder River Basin in Wyoming and exported via ports located either in Washington or Oregon. While there are marketing, environmental and social challenges associated with the plans, it is possible that coal could be exported from the north west of the US within the outlook period, which could boost US exports beyond 30 million tonnes a year.

Mozambique is a relatively new contributor to thermal coal trade and exported its first significant shipment in 2011. Mozambique’s exports are expected to increase gradually over the short term before growing strongly in the second half of the outlook period. Mozambique’s exports are supported by the Moatize coal project which is owned and operated by Vale. Production and exports from Moatize are expected to ramp up to about 3 million tonnes of thermal coal by 2015. There are a number of other projects that are either under construction, such as the Benga project, or in the planning stage that will also support export growth over the second half of the outlook period. To support higher exports, expansions to port and rail infrastructure is being proposed in the north and south of the country.

Mongolia is another relatively new thermal coal exporter, but has significantly increased its production and exports over the past few years. Most of Mongolia’s coal is exported to China, initially by truck to the Chinese boarder before being loaded onto China’s rail network bound for power generators in northern China. In 2010, Mongolia exported around 6 million tonnes of thermal coal compared with 0.2 million tonnes 5 years earlier. Given the expected growth in demand from China, Mongolia’s thermal coal exports are expected to continue growing, underpinned by new mine developments. However, significant growth in Mongolia’s exports over the medium term is dependant on the construction and connection of rail infrastructure from coal fields to the Chinese boarder, and beyond to Chinese power stations.

Australian export volumes and values to increase

Expansions at a number of mines and increased investment in infrastructure development will continue to support export volumes and earnings. In 2011–12, thermal coal export volumes are forecast to increase by 13 per cent, to 162 million tonnes. Due to increased export volumes, Australia’s thermal coal export values are forecast to increase by 24 per cent to $17.9 billion in 2011–12 (see Figure 4).