The coal market in the next five years

Transcription

1 The coal market in the next five years Noble s medium-term view of Energy Coal Presented by: Gerry Feerick Director Energy Complex, Indonesia May 30, 2016

2 Lower for longer is it? 2 The international coal market is starting to show signs of rebalancing The domestic Chinese market will also rebalance as a result of government actions to cut excess capacity Indonesia and the USA will continue to cut exports, leading to a potential increasing tightening over Indian imports will become weaker in the short term, but ramping up domestic production will become increasingly difficult in the long term, leading to a second wave of imports growth The Southeast Asian market will deliver solid growth over the next couple of decades, as a result of multiple factors aligning to support coal demand The market will enter a new cycle in , as supply tightens and mining costs provide price upside

3 3 General considerations on coal demand Presented by: Gerry Feerick Director Energy Complex, Indonesia May 30, 2016

4 Paris: What does COP21 mean for coal? 4 The ultimate target of the Agreement (limiting global warming to not more than 2C) is an aspirational equivalent to the IEA 450 scenario However, the qualitative commitments included the Agreement resemble an ambitious version of the New Policies Scenario, and implementation details are yet to be agreed (post-ratification) which makes it difficult to assess the actual achievability of the targets Most countries have not yet committed beyond New Policies, and it is acknowledged that peaking will take longer for developing countries In reality, developed (OECD) countries might converge faster towards a lowcarbon scenario, but developing countries will not reach 450 mode until after 2030 COP21 is not likely to produce short-term effects in the seaborne coal Market, as most of the new demand will come from developing countries in the Asia Pacific Region

5 IEA s coal demand outlook IEA s total global coal demand scenarios IEA Scenarios Definitions» The Current Policies Scenario only takes account of the mitigation policies that were enacted as of mid (Global coal demand increases by 2.4Bt by 2040)» The New Policies Scenario takes into account the policies and implementing measures affecting energy markets that had been adopted as of mid (as well as the energy-related components of climate pledges in the run-up to COP21, submitted by 1 October), together with relevant declared policy intentions, even though specific measures needed to put them into effect may not have been adopted (Global coal demand increases by 700Mt by 2040) 5 Source: IEA WEO 15» The 450 Scenario illustrates what it would take to achieve an energy trajectory consistent with limiting the long-term increase in average global temperature to 2 C, primarily by by fostering technologies that are close to becoming available at commercial scale. (Global coal demand decreases by 2.0Bt by 2040)

6 450 Scenario PWh New Policies Scenario PWh Global power generation fuel mix Coal s share set to decline; absolute volume starts to decline post-2020 in the 450 Scenario 6 Power generation fuel mix shares Absolute power generation fuel mix 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 41% 37% 35% Other Hydro Nuclear Gas Oil Coal 100% 30 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 41% 35% 31% Other Hydro Nuclear Gas Oil Coal Source: Noble Research; IEA WEO 2015

7 Coal price in a bear cycle, but demand still high 7 Maintaining coal prices low prices is harder now that the market is four times the size in the 1990 s!

8 8 Global Coal demand in Presented by: Gerry Feerick Director Energy Complex, Indonesia May 30, 2016

9 China: What to expect from in The Chinese coal market has been weak since 2012, but some signs of stabilization have started to emerge Chinese domestic prices have rallied, as the government makes efforts to cut oversupply Source: Reuters Old mines have been shut in several provinces, and the government is managing the transition to control impact on employment

10 Country View: China Trying to phase coal out, but inertia is still strong 10 Our view of electricity generation growth in China conservatively assumes the middle-point between IEA s New Policies and the 450 Scenarios The resulting energy mix shows coal use peaking in 2020 but requires massive developments in Nuclear, Hydro and other sources We assume the Chinese Government will have the political will to deflect the growth of coal, but will have to pay a price for it Source: Noble research The question then becomes the level where domestic coal supply can be sustained at...

11 Country View: China Trying to phase coal out, but inertia is still strong 11 Electricity Generation [TWh] Total Generation 4,247 5,604 6,967 7,782 8,589 % Coal in the mix 78% 70% 60% 53% 46% Coal demand - electricity [mt] 1,580 1,828 1,883 1,805 1,742 Industrial Coal Demand Total coal demand 2,830 3,151 3,079 2,910 2,780 Domestic Production [Mt] 2,700 3,021 2,950 2,750 2,600 Imports [Mt] Sources: Composite Coal demand in China is about to peak, or perhaps it has already done so In order to displace coal in the mix, China will have to undergo aggressive expansions in almost every source of power especially nuclear and renewables On the other hand, production cuts in the coal industry are a high priority in the 13 th five-year plan ( ) and will support domestic prices Demand for coal imports is starting to stabilize, and will find support as the Chinese domestic market rebalances

12 Country View: Korea A strong pipeline of coal-fired projected to support demand 12 The Korean baseload will continue to rely on its traditional mix of coal, nuclear and gas in the outlook period Between , coal-fired generation will remain supported by a strong pipeline of projects Nuclear generation will remain flat, as renewables and gas take an increasing share in the mix NOBLE Electricity Generation [TWh] Total Generation % Coal in the mix 44% 47% 50% 48% 47% Coal demand - electricity [mt] Industrial Coal Demand Total Sources: Composite

13 Country View: Japan Coal to remain baseload, even if nuclear restarts go ahead 13 Increasing numbers of coalfired power plants are being built. During 2015, more than 40 plants were reported to be planned for construction. However, some of these new builds will be replacement capacity The biggest uncertainty is the view on nuclear restarts. But nuclear would replace gas in the stack, not coal Source: Noble research Our view also includes a ramp-up in renewables (especially solar) and other low-carbon electricity sources

14 Country View: Japan Coal to remain baseload, even if nuclear restarts go ahead 14 Source: Composite The Japanese coal fired fleet will remain the most efficient in the world, and the country will retain its position as a leader in coal technologies Pipeline of solar projects relatively strong, and getting attention from the government in coming years Oil burn for power generation needs to be phased out of the mix, and will be replaced by coal

15 India: Coal Demand in Strong, even under the most moderate scenarios 15 The main driver for increasing Indian demand will continue to be the electricity sector However, Industrial demand, mainly cement and sponge iron will remain strong markets for coal especially imported grades Source: Composite The stock-and-sale sector will also remain a strong niche for imports

16 India: Domestic production in How long can the domestic coal boom last? many factors at play 16 Noble agrees with other forecasts that coal production in India will continue to increase in the short term However, we see a series of factors limiting the upside in domestic production: Physical limits to the expansion of Coal India, which we see reaching 700 million tonnes in 2020 Limited success in the development of private mining (coal blocks) Source: Composite Growth pains in infrastructure Declining domestic coal quality

17 Country View: India The detail behind out estimates 17 Electricity Generation [TWh] Total Generation 960 1,245 1,766 2,251 2,848 % Coal in the mix 68% 79% 69% 63% 60% Coal demand - electricity [mt] ,103 Industrial Coal Demand Total coal Average kcal/kg NAR ,108 1,343 Domestic Supply , kcal/kg NAR Sources: Composite In spite of a pot ential decline in participation in the energy mix, coal demand in India will continue to grow in absolute terms in We estimate demand growth of approximately 200 million tonnes in Imports will decline in the short term as a result of increasing domestic supply However, imports will return to growth post 2020, as domestic production in India struggles with bottlenecks at mines and supply chains

18 Regional View: Southeast Asia Thriving energy demand 18 Electricity demand in Southeast to double by 2030 Coal and gas will continue to be the main fuels for electricity generation as Hydro and Nuclear are limited options in this region Source: Composite The pipeline of projects in Indonesia, Vietnam, Philippines and Malaysia is well under way, with a high percentage of projects already under construction, or in advance stages of development

19 Regional View: Southeast Asia The detail behind out estimates and resulting coal demand 19 Electricity Generation [TWh] Total Generation ,063 1,295 1,560 % Coal in the mix 31% 36% 41% 44% 46% Coal demand - electricity [mt] Industrial Coal Demand Total coal Average CV Sources: Composite Coal demand in Southeast Asia will grow by 242 million tonnes between 2015 and 2030 Growing demand domestic demand in Indonesia will increasingly limit availability for the export market Approximately half of this growth will take place in the Indonesian domestic market Vietnam and Philippines will also become very important markets in the next 5 years

20 20 Coal Supply and Demand Balance Have we passed the bottom? Presented by: Gerry Feerick Director Energy Complex, Indonesia May 30, 2016

21 Coal View: Demand in Coal Demand Pacific China Northeast Asia (ex-china) India South Asia (Ex-India) Southeast Asia UAE + Africa Atlantic Europe Mediterrenean Americas Total Source: Composite Global coal demand contraction is likely to continue until 2017, but the rate of decline will start to slows in late in 2016 negative outlook has been priced-in India imports are likely to disappoint in the short term due to increasing domestic production, but imports will remain very much needed The stabilization of China, and new demand from Korea and Southeast Asia will support the market post-2017 The fall of the European market will continue though 2020, but the Mediterranean and Latin American markets will remain firm

22 Coal View: Supply in What would happen to the coal market if prices remain at current levels? 22 Coal Supply Indonesia Australia Russia Colombia South Africa US Other Total supply Total Demand Balance Source: Composite The seaborne market has started to tighten due to the drop in coal supply from high-cost origins At current prices, Indonesia and Australia will not ramp-up production when the market needs it (2018) Only the lowest cost producers with existing spare capacity can expand (Colombia and South Africa) USA will all but disappear from the export market as a result of its lack of competitiveness

23 We see price support from costs in 2020 Sub-50 $/t views carry significant upside risks due to oil and FX exposure Demand = 880 million tonnes 2020 Demand (Noble outlook) = 847 million tonnes Marginal cost 70, 2020 FX) = $70 Marginal cost 30, Current FX) = $60 Current spot price = $50 We see long-term price support from costs: Current price levels do not support greenfield developments existing capacity will be stretching in 5 years The most important driver costs are producer currencies RUB, IDR, AUD, COP, ZAR - low coal prices command currencies to remain low in the long term Source: CRU, Noble Analysis FX Assumptions (2020 CRU): 1.34 AUD/$; 56 RUB/$; IDR/$; 2540 COP/$; Volumes based on CRU projections for 2020 Spot price shown for prompt loading in 6000 kcal/kg at Newcastle port, FOB Even assuming demand collapses to 800 million tonnes by 2020 (an extreme case), current prices are not sustainable The second most important driver of costs are oil prices upside in oil will support coal

24 24 Can support come from costs? Presented by: Gerry Feerick Director Energy Complex, Indonesia May 30, 2016

25 Conclusions and takeaways 25 The global seaborne market has started to show signs of rebalancing Current coal price levels will lead to an increasing shortage of coal supply in the next five years, and potentially beyond Coal production costs are highly dependent on currencies and oil prices assuming current coal prices are sustainable requires producer currencies and oil prices to remain weak

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