Stagnant Demand, Volatile Trading Dogs Coal

 

That's the central message of the International Energy Agency's Coal 2017 report, which outlines a future in which coal remains a significant source of global energy, but one that is decreasing in importance.

 

Global coal demand will grow by only a compound 0.5 percent a year over the 2018-22 period to 5,534 million tonnes of coal equivalent (mtce), up just 177 mtce from 2016's consumption, the IEA said.

 

Top consumer China is expected to drop 0.1 percent a year to 2,787 mtce by 2022, while demand in the United States will fall 0.9 percent per annum over the five-year forecast period, and that in developed countries in Europe by 1.6 percent per annum.

 

India remains the best hope for coal producers, with thermal coal demand expected to climb 3.3 percent a year to 605 mtce by 2022.

 

Positive contributions to growth are also expected from newer consumers such as Pakistan and countries in Southeast Asia.

 

But overall, it's pretty grim reading for coal miners, traders and their political backers, such as U.S. President Donald Trump and the ruling Liberal Party in top exporter Australia.

 

The IEA report also continues a trend of increasingly bearish forecasts from the agency, as it has steadily reduced its expectations for coal's share of global energy.

 

The IEA's 2012 coal report forecast that global coal consumption would rise to 6,169 mtce in 2017, but the reality has turned out somewhat differently.

 

The IEA didn't provide a forecast for 2017 in its latest report, but said demand in 2016 was 5,357 mtce and estimated 2018 at 5,445 mtce.

 

In other words, the IEA's forecasts from five years ago were too optimistic for the industry, even if they seemed reasonable and quite cautious at the time they were published.

 

The risk for coal is that the IEA is still being a tad optimistic with its outlook for the next five years.

 

The report does highlight several factors that may weaken coal demand, including China's efforts to boost the use of natural gas over the more polluting fuel.

 

China had 560,000 industrial boilers at the end of 2014, of which about 460,000 were coal-fired, consuming about 600 million tonnes of coal a year, the IEA said.

 

It's these industrial boilers that are being targeted by Beijing as part of efforts to combat air pollution, and the IEA estimates that 110 million tonnes of coal a year could be displaced by natural gas by 2022.

 

Notwithstanding this winter's scarcity of natural gas, and subsequent higher prices, it appears the Chinese authorities remain determined to reduce coal burning, and the risk is that they are more successful in coming years than the IEA expects.

 

China remains the key for the outlook for seaborne coal demand and prices, and the IEA's base case for a slow decline in coal consumption over the next five years fits with the current policy setting in Beijing.

 

But what the IEA report also highlights is that the seaborne markets are largely hostage to policy setting in the world's two largest importers, China and India.