The Death of Coal has been Greatly Exaggerated

The following is a presentation and overview of from the International Energy Agency's Mid-Term Coal Market Report. I think the heading below says a lot- only shale gas stops coal demand growth. The IEA lays out the case that demand growth from India, China, and other emerging markets will significantly increase over the next five years. That said, the IEA states the biggest risk for coal demand is the surge in shale gas.

Shale gas supply growth may have hurt coal demand and pricing in the near-term, but longer-term this dynamic may change. It is still my opinion that one aspect of shale gas supply is being overlooked by most forecasters and the market, namely that shale gas production does not follow the production stream of a conventional natural gas well. Shale gas production follows a steep initial production curve. However, production rates have a tendency to fall precipitously after a few months to two years after initial production begins, as production rates can fall 80% to 90% or more form starting production capacity. This will make shale gas natural gas production uneven, create supply uncertainty, and potentially cause significant price volatility in natural gas over the long-term

It remains my opinion that the death of coal has been greatly exaggerated and that many coal companies stocks over significant long-term value. That is if you can stomach the volatity and risk.
 

Only shale gas stops coal demand growth

18 December 2012

• Coal demand is growing everywhere but the United States. The trend of the last decade continued in 2011, with coal supplying near half of the incremental primary energy supply globally. Coal demand grew 4.3% in 2011, or 304 million tonnes (mt). Chinese demand grew by 233 mt. The only region where coal demand declined was the United States. That drop is neither policy-driven nor a consequence of recession but rather the result of the availability of cheap gas.
• Even though coal demand growth is slowing, coal’s share of the global energy mix is still rising, and by 2017 coal will come close to surpassing oil as the world’s top energy source. The world will burn around 1.2 billion more tonnes of coal per year by 2017 compared with today. That’s more than the current annual coal consumption of the United States and Russia combined.
• China has become the largest coal importer in the world. In 2009, China became a net coal importer for the first time. In 2011, it became the largest coal importer, surpassing Japan, which had held the position for decades. Chinese imports (including Hong Kong) reached 204 mt in 2011 and they continued to grow in 2012.
• Indonesia has become the largest coal exporter in the world. As another example of the increasing weight of non-OECD countries, Indonesia surpassed long-standing leader Australia as the largest exporter on a tonnage basis. Floods in Queensland in 2010-2011 constrained Australian exports, while Indonesia growth did not stop, surpassing the 300 mt line.
• The coal renaissance in Europe is only temporary. Low CO₂ and high gas prices plus coal oversupply coming from US have made coal more competitive than gas for power generation, triggering coal consumption. However, increasing use of renewables, retirement of coal plants, and more balanced gas and coal prices will decrease coal consumption in most of Europe. All in all, coal demand in 2017 will be 10 million tonnes coal equivalent (mtce) higher than in 2011, as growth in Turkey will offset the more general decline.
• Bad times for US coal. The fiercest competition for coal occurs in United States, where gas has gone below the $2/MBtu line. Whereas exports recently could alleviate the plight of US coal producers, declining demand will give rise to cuts and layoffs in mines, especially in the high-cost Appalachia area. Medium-Term Coal Market Report 2012 projections for US coal demand by 2017 are 600 mtce, a dramatic fall from 697 mtce in 2011. US production is projected to fall from 771 mtce in 2011 to 697 mtce in 2017.
• India will increase its influence in coal markets. Endowed with large coal reserves, a population of more than 1 billion, electricity shortages and the largest pocket of energy poverty in the world, India makes the perfect cocktail to boost coal consumption. Domestic industry’s performance will allow India to be the largest seaborne coal importer by 2017 with 204 mtce and the second-largest coal consumer, surpassing United States.
• Australia will recover its throne as the biggest coal exporter. Despite some issues such as rising labour costs and domestic currency rate, which give Indonesia competitive advantages, Australia will concentrate a great share on infrastructure and mine expansion investments to become the largest exporter, with 356 mtce by 2017, well above Indonesia’s total exports then of 309 mtce.
• Enough investments are planned and in progress to ensuresupply. Uncertainties will delay or cancel many of them. In the pipeline are almost 300 million tonnes per annum (mtpa) of terminal capacity and the 150 mtpa (probable) to 600 mtpa (potential) of mine expansion capacity, more than enough to meet coal demand in a secure way over the outlook period. But current low prices and uncertainty about economic growth, especially when related to China, will delay and stop some investments.

IEA Coal