Coal industry suffers as demand falls short of supply

Posted on October 31, 2016

2015 is fast becoming a big year for both the global oil and coal industries. Up until mid-last year, oil prices hovered over $100 per barrel, but with its excessive production paired with falling demand, the prices have significantly plunged by almost 50%. The coal industry has also been struggling. The fall in prices which was initially thought to be temporary has persisted, and due to a similar over-production of supply, coal continues to decrease in value.  Years of buildup in the mining capacity have forced global coal prices to tumble and there’s little hope that the industry will be back firmly to its knees.

Coal industry over-supply results in decrease of value

The growing energy revolution across the world has hit oil and coal prices in Australia hard. The coal industry, which experienced a peak in 2011 has had a rough patch with the last few months being particularly tumultuous as prices steadily declined in response to over-supply as well as a decrease in demand for exports from countries including China.

In the last September quarter, the Australian benchmark contract price for the highest quality metallurgical coal remained at $US 120, a value that rendered numerous coal operations unprofitable. Thermal coal on the other hand fared worse, with prices averaging at US$73 a tonne, down by 16%, during the same period.

Despite the fall in the global oil prices which were majorly instigated by the oil war, (Brent prices fell below $64 per barrel while WTI (West Texas Intermediate) oil prices plunged to below $61 per barrel as of December 12), the production of oil hasn’t been affected.

Producers announce they won’t cut supply at OPEC meeting

According to the OPEC’s (Organization of the Petroleum Exporting Countries) meeting held on November 27, oil producers won’t cut production as a way of defending market share. Indeed, cutting oil production would lead to lower supply and if demand was to remain stable, the prices would rise.

Interestingly, the lower oil prices are not a threat to coal demand, even if oil hits ~$50 per barrel. Again, prolonged low oil prices would translate into lower diesel prices (diesel is a major cost in coal production) which would be beneficial to coal companies that would enjoy lower diesel costs for running their mining equipment.

With the continuous fall in oil and coal industry prices, there’s need to shift some oilrigs so as to produce other more sustainable forms of energy such as solar, wind and natural gas. Generally, oil wells produce some natural gas and therefore if utilized for drilling natural gas wells, the production of the sustainable resource would go up. As a result, natural gas prices would be put under pressure. Coal and natural gas are competing fuels in generation of electricity in Australia and their fortunes hugely depend on the country’s electricity output.  In this case, if natural gas prices remain low, this would also have a negative effect on production in the coal industry.

Coal industry still remains Australia largest source of energy

The decreasing oil prices have a more positive impact on coal demand and production. The coal industry produces three-quarters of the electricity used to power industries as well as Australian homes. Even so, there are so many legitimate reasons why coal production is perceived as negative. The air quality issue as well as the health concerns over the toxins released from burning coal at the forefront of campaigns against coal production.

These are some of the main issues that have seen some countries take firm stands against coal production. For instance, the Mercury emissions regulations introduced by the U.S in 2012, coupled with cheap gas supplies; instead of paying for expensive retrofits led to the shutdown of coal plants by many utilities. On the other end, China has been struggling with carbon and air quality. The Big bang measures by Deutsche Bank to fight air pollution in China (March 13) analysis indicating the winners and losers clearly demonstrates that capital markets have started considering these issues. It also reveals the new opportunities produced by the energy transition for those willing to adapt to the new energy context.

Of course, the decreasing value of coal has had a serious effect on the industryAustralia Mining estimates over 2,500 jobs were cut in the coal sector alone, as many companies downsized or shut down their operations completely.  Coal’s fall from grace also led to the close of operations by The Integra, a coal complex in the Hunter Valley, taking away 500 jobs with it.

Isaac Plains, another company in central Queensland, went into a session of care and maintenance, cutting about 300 jobs. And when Glencore decided to shut down its operations for three weeks, many were dumbfounded. In a statement, the company claimed that the action was a "considered management decision given the current over-supply situation". If you ask my opinion, this passes for a vote of no confidence for the future growth of the Australian coal industry.

The consistent supply of coal online by competitors like Colombia, Indonesia and South Africa complicates the situation for Australian miners. The matter becomes even worse with the rising production of natural gas by the United States. In essence, this means that thermal coal will be exported to other global markets, instead of being used in the domestic market where it is one of the primary energy sources. With the oversupply of coal in the global market, this will definitely place a lid on prices, and more so if China gets a handle on its coal industry production costs and capacity.

While the coal industry keeps experiencing massive job cuts as well as a cyclical downturn in prices, the underlying trend of rising support for renewable energy driven by the likes of the U.S. and Europe, will grow for decades to come. Australia must rise to the occasion and realize that our shortsighted policies regarding coal industry reliance is outdated. Consequently, the country must restructure its energy sector and make a move towards investing more in renewable energy sources.

Renewable sources the best way forward for the Australian energy market

Most Australian coal companies have seen the writing on the wall and understand that the math no longer adds up. A longer-term solution for the energy industry is the move towards zero carbon-intensive energy sources such as solar, wind and natural gas. Currently, renewable energy sources account for about 5% of power generated globally, however, over the past decade, investment in renewables has been growing at a faster pace compared to coal.

Thanks to the great innovations in the technology world, battery storage capabilities, electric vehicles, mobile phones and applications are just but some of the indications that it’s only a matter of time before solar eventually drives the coal industry out of the energy equation.

During an interview by The Business on ABC television, Steve Sammartino, a digital disruption analyst said that in just five years, renewable energy sources like solar will compete effectively with coal and other fossil fuels for energy production.

Today, about 200 institutions in the U.S are strongly backing a renewable energy campaign launched to stop investments in companies that generate fossil fuels such as coal. This is likely to be the trend in the near future.

With coal prices already below half of what they were a year ago, majority of investors are backing divestment in coal as a more economically viable strategy, and instead embracing alternative renewable sources of energy.

This article was originally published on: Energy Daily


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