As Shortfall Looms, Coal Enjoys Unexpected Boom

Despite coal’s high levels of pollution, utilities and governments in emerging economies, at least for now, largely prefer coal-fired power stations over other fuels including natural gas in order to meet soaring energy demand.

Many a swan song has been sung for thermal coal markets as renewable power generation and a push towards using more natural gas have gained traction.

Yet a coal price spike last year, driven by a Chinese change in regulation that capped local mining operations, has shown how easily markets can swing from oversupply to shortfall.

While many analysts and investors see the long-term outlook for coal as bleak due to policies and technological advances that favor cleaner natural gas and renewable in power generation, the shorter-term outlook for the industry has seen a sharp reversal of fortunes.

This year, strong demand growth in Asia’s emerging markets will create a supply shortfall for the first time in at least half a decade. Consumption could even soon rise past the 2014 peak, according to Asia’s largest commodity trading house, Noble Group.

Despite coal’s high levels of pollution, utilities and governments in emerging economies, at least for now, largely prefer coal-fired power stations over other fuels including natural gas in order to meet soaring energy demand.

While gas and solar prices have fallen sharply, coal remains one of the cheapest, easily available, and most easily maintained sources of electricity.

More than 10 gigawatt (GW) of coal-fired power stations were sanctioned for construction last year in Southeast Asia, where most new demand stems from, compared to just 4.6 GW of gas-fired projects, according to energy consultancy Wood Mackenzie.

“New markets like the Philippines and Vietnam are starting to seek our coal,” the chief executive of Indonesian coal miner PT Bukit Asam, Arviyan Arifin, told Reuters this week.

Rodrigo Echeverri, head of thermal coal analysis at Noble, believes this year’s global thermal coal market will be 13 million tonnes short of meeting 911 million tonnes of demand, compared with a broadly balanced market in the last three years.

The tightness is a result of falling output after some companies including U.S. giant Peabody Energy, filed for bankruptcy, and other miners cut output at unprofitable mines.

At the same time, Chinese imports grew by 43 million tonnes as a result of restrictions on local production, while new coal-fired power plants were commissioned in countries including Vietnam, Malaysia, Philippines, Taiwan, Echeverri told a conference in South Africa this month.

To meet the imminent shortfall, some miners have again begun ramping up output.

Indonesia, the world’s biggest thermal coal exporter, said this month it is targeting production of 470 million tonnes in 2017, compared with its previous goal of 413 million tonnes and up more than 8 percent on last year.

There are also signs that Australian thermal coal output is picking up, with exports from Queensland hitting a record last year.