"Substantial fuel-switching in key coal-consuming sectors—such as power—could occur as natural gas supplies come online."
(February 7, 2013) – Chinese coal imports will peak before the end of the decade and enter a prolonged period of decline, challenging assumptions that the country’s demand for internationally-traded steam coal could continue to rise inexorably, according to a major new IHS study. A moderation of demand combined with a rise in domestic supply and improved transportation will bring international producers into increased competition with domestic suppliers, the study says.
IHS analysis shows that imports have already peaked at 145 million tons of standard coal equivalent (SCE) in 2012. A gradual, long-term decline is expected ahead through 2035.
“Many companies that have targeted China as their strategic supply region in the long term may need to rethink that strategy,” said Xiaomin Liu, associate director of IHS CERA in Beijing. “Some international suppliers will be able to compete effectively, but others will struggle to find a competitive edge as China’s market becomes ever more liquid.”
The study, Coal Rush: The Future of China’s Coal Market, represents the most comprehensive research to date on the Chinese coal market, providing analysis on coal supply, demand and logistics. The study examines all aspects of the coal market structure in China, including coal resources, production trends, cost of production and coal quality at the national, regional and field levels.
China became a net coal importer in 2009 and a key driving force in the international seaborne coal market as the country’s import volumes ballooned. However, several factors are combining to make China’s recent dramatic growth in coal imports short lived, the study says.
China’s coal demand growth is expected to decelerate due to moderating economic growth and fuel diversification, among other factors. Raw coal demand is expected to peak around 2025 around 5.1 billion metric tons (bt), up from 3.7 bt in 2011. This represents an annual average growth rate of 2.4 percent compared to a 10 percent average growth rate over the past decade, the study says. Steam coal demand is expected to peak shortly after (around 2027) at about 4.3 bt before gradually declining.
At the same time, new productive capacity has been continuously added in China as a result of the high price-driven investment in the mining sector that totaled RMB1,600 billion ($250 billion) over the past five years, the study says. China’s productive capacity for all types of coal has increased nearly four-fold over the past decade to more than 4 bt a year and is expected to grow further as demand rises.
More importantly, transportation bottlenecks between domestic coal fields and demand centers emerged as a result of the rapid rise coastal consumption, adding costs to delivered prices along the coast that helped make imports more competitive. These bottlenecks are now being addressed, the study says. (IHS expects 800 million metric tons of new coal-carrying railway capacity to come online in the next five years, releasing currently “stranded” productive capacity to the market.)
Domestic mining costs also have the potential to come down. Cost escalations as companies complied with safety, environmental and labor regulations following a government-commenced consolidation process begun in 2008 are coming to an end and mines are achieving much greater scale of economy, the study says.
The combination of demand moderation, supply growth and improved transportation are expected to drive the drop of import volumes during 2015-2020 as the market enters the downward part of the current cycle. But an additional factor will prolong the downward trend beyond 2020, the study says.
“The early 2020s is when China’s own shale gas revolution is expected to begin,” Xizhou Zhou, director of IHS CERA in China said. “Substantial fuel-switching in key coal-consuming sectors—such as power—could occur as natural gas supplies come online.”
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