Commentary: Coal’s place in the shifting global energy mix

Given the mining industry’s extended cycle times, companies regularly look for insight relative to long-term commodity demand patterns. One area that may require more concerted focus relates to the shifting global energy mix.

In many ways, this discussion begins and ends with the outlook for thermal coal. On the one hand, the extent to which societies appear to embrace renewable generation is catching many people off guard. The environmental issues raised by burning coal are prompting countries across the world to explore alternative energy generation options — from nuclear and gas to solar, hydro and wind power.

China’s thermal coal consumption, for instance, fell 3% in 2014, despite a 3.8% increase in electricity output. In its bid to reduce greenhouse gas emissions up to 65% from 2005 levels, the country plans to increase its share of non-fossil fuels to 20% of its primary energy consumption by 2030. These are significant indicators given China’s historical role as the world’s largest coal consumer.

Alternate power sources are expanding to bridge the gap. Beyond signing mega-contracts with global LNG suppliers and developing domestic gas supply, including shale, China is investing billions of yuan to fund clean energy production. Already, China plans to increase installed capacity of wind power from 96GW to 200GW, and of solar power from 28GW to 100GW.

It also plans to use natural gas for more than 10% of its primary energy consumption by 2020.

And China is not alone. In 2014, installations of renewable power plants surpassed 100,000 megawatts of capacity.

None of this is good news for coal producers. Whilst the fall in producer currencies and lower oil prices have given the industry some unexpected relief, these cost tailwinds are providing incentives to increase output at a time when producer discipline is essential, if global thermal coal markets are to return to balance.

Despite China’s decision to restrict imports, coal demand is not the real problem. The issue is excess supply. According to Deutsche Bank’s supply/demand models, thermal coal is running a 30-million-ton surplus, which could rise to 68 million tons in 2018.

These factors have some people predicting an imminent demise for coal. Junior coal miners are taking the brunt of this impact, with a high percent of the sector battling for survival.

On the other hand, most major energy forecasters agree that coal will remain a critical component of the global energy mix for years to come. According to the U.S. Energy Information Administration, fossil fuels will continue to supply nearly 80% of world energy use through 2040.

Looking at electricity alone — which the International Energy Agency (IEA) says will remain the fastest-growing final form of energy worldwide — by 2040, 56% of power will still come from fossil fuels,including 31% from coal.

While coal could lose market share to natural gas and renewables, dropping to 20% of the total global energy mix by 2040, it is not yet on the way out.

In fact, global demand for coal could rise to 9 billion tons by 2019, growing an average 2.1% per year.

Energy shortages in countries across Africa, Asia and South America — coupled with an anticipated 40% spike in global energy use by 2040 — may also boost demand for fossil fuels.

There are questions, too, as to whether China can afford to stop burning coal at its intended rate. Pollution is a critical issue, but power shortages would cause more social backlash. This may explain why the IEA forecast China’s thermal coal demand would grow to nearly half a billion tons by 2019. Despite China’s efforts to moderate its coal consumption, it will still account for 60% of demand growth during the outlook period.

These demand factors also hinder efforts to curb coal production. While countries in developed nations are adopting environmental agendas to reduce coal reliance, coal production in countries with less stringent regulation may rise apace to meet global demand.

But while coal’s demise may be premature, the move to alternative power sources is inevitable. Natural gas, which accounts for 20% of the global energy mix, could account for 25% of global energy use by 2040, surpassing coal.

Similarly, nuclear power is enjoying a global resurgence, with installed capacity set to grow 60% to 2040. Nearly half of the world’s current operating reactors will need to be retired by that date, but over 60 reactors are under construction in 15 countries.

Although some uranium producers are struggling to realize a profit at current prices, several low-cost U.S. producers have signalled an intent to ramp up if uranium oxide spot prices hit US$50 per lb.

With demand for nuclear rising, Macquarie forecasts a gradual price increase to US$53 per lb. through 2019 — rising to US$60 per lb. over the long-term.

And the renewables genie cannot be put back into its bottle. Perhaps, like exponential technologies, renewables have not yet hit their full growth stride (much like the shale gas revolution in the U.S. seemingly took the world by storm). Although renewables account for only 3% of the global energy mix, that number is set to rise to 8% by 2035.

Renewables’ share of power generation is expected to grow from 21% in 2012 to 33% by 2040, overtaking gas as the second-largest source of generation in the next few years, and surpassing coal as the top source after 2035.

— Philip Hopwood is a partner with Deloitte Canada and leads its Global Mining group. His areas of expertise include performance improvement, operating model development and value extraction from business transformation initiatives.

The above commentary represents an edited excerpt of one chapter in Deloitte’s newly released 48-page report, entitled: Tracking the trends 2016: The top-10 issues mining companies will face in the coming year. For footnotes to this commentary and to view the full report, please visit www.deloitte.com .