A detailed research report on this topic is available here

Global coal demand is driven by Asia Pacific consumption

Despite criticism of the pollution caused by coal consumption, it is still ranked as the second most important primary energy source in the world. Global demand for coal was flat from 2008 to 2009 due to the Global Financial Crisis (GFC). Most regions subsequently saw a decrease in consumption, with North America and Europe both experiencing a double-digit percentage decrease. Consequently, world coal consumption has rebounded.

In recent years, increase coal consumption within Asia has offset the falloff in the rest of the world. Indeed, Asia has been the main driver of global coal consumption since 2001, accounting for 69.4% of global consumption in 2011, whilst the combined consumption of North America and Europe-Eurasia was only 28%. Coal demand is expected to continue growing but at a slow pace - until 2016 with China leading the growth.

Although a reduction on the reliance of coal as an energy source is initiated in the market, the Chinese government plans to use coal for about 60% of energy production up to year 2020, thus, coal will remain the dominant energy source for the foreseeable future and its consumption will continue to grow.

Approximately 90% of coal produced is consumed by four heavy industries around the world: Power generation, steel, construction materials and chemicals. In 2011, power generation accounted for 52% of global coal demand, steel and construction materials sectors consumed 18% and 14%, respectively, and the chemical sector consumed 3%.

These ratios remained stable from 2006 to 2011. The electricity sector accounts for the largest share of coal consumption. however, it is influenced  by electricity demand from other heavy industries as it provides more than 60% of the electricity to them. Consequently, steel and cement sectors are weighted heavier on coal demand than the other industries direct consumption of electricity.

Just as Asia dominates coal consumption, the region also dominates global coal mining. In 2011, it accounted for more than 68% of the global coal supply and about 90% of global growth led by a 9% increase in China, according to information from BP. The International Energy Agency found that coal supply will continue to grow until 2016, however, starting from 2014 the global growth rate will slow down as the Rest of World (ROW) supply will start be decreasing.

In China, coal mining increased by 14% annually between 2001 and 2011. China's coal industry was highly competitive up until 2008 due to a high numbers of coal enterprise. However, since 2009 the Chinese government has been restructuring the coal industry to create an oligopolistic market through mergers and acquisitions.

China became a net importer in 2009

China's internal coal supply is concentrated mainly in the northern provinces, with Shanxi, Inner Mongolia, and Shaanxi supply accounting for half of the national output. Since coal consumption is spread amongst different provinces, the dispersed nature of China’s coal mines has led to an additional need for coal transportation. Although the infrastructure is improving, the rail transportation network is still the main cause of coal supply bottlenecks. Prior to 2009, local coal supply and demand were evenly matched. However, China has since become a net importer and the net import amount has continued to grow in 2010 and 2011. In concurrence with findings from JP Morgan regarding China’s coal industry, the local coal supply is also expected to grow in the future.

Global coal prices to keep growing in the next years

Australia's coal price (an indicator for global coal prices) plummeted from a historic high after the GFC in 2008, but it has gradually recovered since late 2009 through global demand growth. According to the IEA and the futures price index, global coal prices will continue to steadily increase through 2016.

Elevated coal prices in China

There are several factors affecting China's coal price. First, the inadequacy of the coal transportation network is a challenge within the industry. The bottleneck in transportation leads to an unstable supply to power generation plants and will possibly cause an electricity short-fall. This would also cause temporary surges in China’s coal price and further impact the Chinese manufacturing sector as a whole.

Secondly, a number of coal mining giants have been established through consolidation over the past few years. These giants accounted for 60% of China’s coal production in 2011 and therefore, they are able to control the coal supply to artificially maintain the price level.

A third factor is the determination of the Chinese government to improve energy efficiency -  “Energy Efficiency for Environment Protection” -  is one of the main focuses in the 12th Five-Year Plan. Although coal will remain the main energy source its energy efficiency must be improved to meet the regulation requirements. This policy is somewhat favorable to green energies and if they can become more popular in China, this could lead to a decrease in coal price in the long run as the green energies become a viable substitute for coal.

Conclusion

Coal is one of the world’s essential energy resources. The Asia Pacific region plays an important role in the world’s coal demand and supply. China and Japan are leading net importers of coal while Indonesia is the leading net exporter. It is forecasted that coal demand from China will continue to grow and China itself will remain the largest coal consuming country in the world.

Since 2008, the numbers of coal mining companies have been reduced through consolidation. As this trend  progresses, the market will become less competitive and eventually  may become monopolized by a few large enterprises. Lack of competition in the future means the price of coal will be difficult to control.

Furthermore, after the Japanese 2011 Tsunami and subsequent nuclear crisis, the world has paid more attention to the potential danger of nuclear energy – up to now considered as  a good substitute for traditional energy resources. This concern over nuclear energy’s potential dangers will surely extend the life of traditional energies, including coal.

A detailed research report on this topic is available here

Resources:
1. International Energy Agency (IEA)
2. JP Morgan China Coal Sector
3. BP Coal Section