Coal enjoys a temporary reprieve

“I’ll be back.” The line from The Terminator that became Arnold Schwarzenegger’s catchphrase captured the essence of the ultra-resilient killer robot he portrayed: every time you thought it was dead, it got up again and kept on going. The coal market often seems to have the same quality. After a steep decline last year, demand for thermal coal has been rebounding, and some prices have hit their highest levels for more than a decade. The revival in demand has been a reminder that the talk about an imminent “end of coal” has been greatly exaggerated. 

Yet while the short-term outlook for coal has improved over the past year, the longer-term outlook has deteriorated sharply. Key markets have set goals for net zero emissions, by 2060 for China and 2050 for Japan, South Korea and Taiwan. The EU has agreed to make its 2050 net-zero goal a legally binding target, and has set an intermediate objective of a 55% cut in emissions by 2030. 

Most recently, the Group of Seven countries last month promised further measures to accelerate the transition away from coal. "Coal power generation is the single biggest cause of greenhouse gas emissions," the group’s statement said. “International investments in unabated coal must stop now and we commit now to an end to new direct government support for unabated international thermal coal power generation by the end of 2021.” 

The change of administration in the US has meant a dramatic shift in the government’s rhetoric on coal. President Donald Trump pledged to “bring back coal”, even though he had little success in achieving that ambition. President Joe Biden is joining an international effort to stop coal investment. 

The end of coal is not in sight, even by 2050. But its decline in the 2030 and beyond now looks likely to be steeper. “It is bumping along a plateau,” says Dale Hazelton, Wood Mackenzie’s head of thermal coal. “There is nowhere to go but down.” 

The recent surge in coal demand and prices has been driven by a combination of forces, in particular the rebound in economic activity after the worst of the slowdown induced by Covid-19, and a cold winter across much of Asia and Europe that depleted inventories. Global imports of seaborne thermal coal, which by weight dropped by 11% last year, are projected in Wood Mackenzie’s forecasts to grow by 6% this year and a further 3% next year. 

China’s ban on thermal coal imports from Australia, imposed last year, has reconfigured trade flows and boosted other producers’ prices as it sought alternative sources of supply. Indonesia this week set its benchmark coal price at its highest level for more than a decade, $115.35 per tonne.  

The rebound in demand seems to have a couple of years left to run. China is still building coal-fired power plants, as are India and other emerging economies, offsetting the closures in Europe. From 2023, however, the seaborne thermal coal trade is likely to level off, at slightly below the peak in reached in 2019.  

From the second half of the 2020s, more coal-fired generation capacity will be shutting down than starting up worldwide, under pressure from both climate policies and competition from low-cost renewables. China’s government, for example, has pledged to start phasing out the country’s coal consumption after 2025, and President Xi Jinping reiterated that commitment in April.  

Worldwide, the great majority of the new generation capacity added will be in renewables and gas, with new investment in coal-fired plants dwindling away. As newer technologies including long-term storage and green hydrogen become viable for backing up renewables, and deadlines for mid-century net-zero goals draw nearer, the decline of coal is likely to accelerate. 

By 2050, global imports of seaborne thermal coal are projected to be about 600 million tons a year in Wood Mackenzie’s base case, down 37% from this year’s level. By the second half of the 2040s, China’s imports are projected to be about 50 million tons a year, roughly a quarter of this year’s level. 

It is unquestionably a challenging outlook for producers, and higher-cost operators will be squeezed out of the market. But coal’s long goodbye does raise the prospect of possible volatility and periods of high prices returning in the future. 

As international investors and lenders, in both the private and public sectors, turn against coal, it is likely to be increasingly difficult to finance new production capacity. But even on Wood Mackenzie’s projections of a steady decline in global import demand from around 2025, new sources of supply will be needed. If that capacity does not get built because coal mines are impossible to finance, there could be more tight markets and price spikes. 

As we have seen this year, rising coal prices can have wide-ranging effects, raising the cost of electricity and driving up prices for alternatives, particularly gas. If constraints on coal supply move faster than the decline in demand, LNG exporters could be among the biggest beneficiaries. 

OPEC dispute leads to weaker oil prices 

One of the most impressive policy responses to the economic shock from the Covid-19 pandemic last year was the move in April by the OPEC+ countries to cut oil production by 9.7 million barrels per day. It prevented a colossal glut of crude on world markets, and provided the stability that made possible the recovery in prices this year. Conflicting interests among the large producing countries always meant that the agreement was potentially unstable, however, and over the past week that potential has broken out into open disagreement. 

The online meetings of OPEC and the wider OPEC+ group ended without agreement on Friday, with another round of negotiations scheduled for after the weekend. The meeting of OPEC+ ministers planned for Monday was abandoned, however, when it became clear that a deal could not be reached. Mohammad Barkindo, OPEC’s secretary-general, said no date had been set for the next meeting. 

The critical issue preventing agreement was an argument between Saudi Arabia and the United Arab Emirates over how much the UAE should be allowed to produce as the OPEC+ group unwinds the curb restraints adopted last year. Ann-Louise Hittle, Wood Mackenzie’s head of Macro Oils, said there was a growing difference in oil policy, as the UAE sought to use its new productive capacity and allow investors in its infrastructure and oil projects to get returns.  

The official position following this breakdown is that OPEC+ policy remains unchanged, committed to keep 5.8 million b/d off the market in August. However, we think the group’s output is nevertheless likely to increase. OPEC members including the UAE, Iraq and possibly others could increase production, even if Saudi Arabia does not. The Financial Times quoted a source suggesting that quitting OPEC remained a possibility for the UAE, albeit as “very much the nuclear option… [with] plenty of steps to go through until we get there.” 

The news from the meetings pushed and pulled the oil market in opposing directions. On Tuesday Brent rose at first, climbing almost to $78 as the failure of the OPEC+ countries to agree a relaxation of production curbs seemed like a bullish indicator. After that, however, it fell sharply, dropping below $73 a barrel for a while, as the market focused on the prospect that the group’s weakened cohesion could lead to output increasing.  

The agreement in April 2020 followed weeks of turmoil in oil markets, after OPEC+  members initially failed to strike a deal. Market conditions now are different: the world is exiting from the pandemic, even if unsteadily and unevenly, rather than entering it. But oil producers can still benefit from working together, even if their interests are not identical. The OPEC+ ministers could reconvene in early August to discuss September production, and may well decide that they would do better to try to preserve the unity that has served them so well over the past 15 months. 

In brief 

BP published its 70th annual Statistical Review of World Energy, which as usual was full of fascinating insights. One calculation from chief economist Spencer Dale particularly stood out. Global greenhouse gas emissions from energy use dropped by 6.3% last year — the steepest decline for 75 years — while the world economy also suffered a severe downturn. Comparing the fall in emissions with the decline in global output, Dale said, you could work out an implied cost of almost $1400 per tonne of carbon dioxide equivalent kept out of the atmosphere. That is an exorbitant price, much higher than anyone is contemplating as a practical carbon price today. If countries are to make progress towards their net zero goals, emissions reductions will have to be available at a much lower cost than that. 

More than 75 large US companies, including Apple, Google and General Motors, have signed a letter to Congress urging US lawmakers to enact a federal clean electricity standard, which would mandate that 80% of the country’s power generation should be carbon neutral by 2030, and 100% by 2035. 

Governor Greg Abbott of Texas has written to the state’s Public Utility Commission, urging it to strengthen incentives “to foster the development and maintenance of adequate and reliable sources of power, like natural gas coal and nuclear power”. Critics have pointed out that biggest source of problems during the freeze in February was gas-fired generation, and nuclear and coal plants also suffered unplanned outages. 

The success of the Euro 2020 football tournament has provided some great exposure for Gazprom, one of the main sponsors. Italy and England, the two finalists, are both significant buyers of Russian gas. To celebrate its sponsorship, Gazprom has invented a new award for the best goal of the tournament, which will be awarded as a digital non-fungible token. 

And finally: the latest hot innovation in electric mobility. Mark Zuckerberg, founder and chief executive of Facebook, attracted no small amount of derision last weekend when he chose to celebrate the 4th of July by posting a video of himself holding an American flag, skimming across a lake on a “dork’s surfboard”. 

The approved name for his machine, which Zuckerberg was seen riding a couple of times last year, is an eFoil. They are boards that use hydrofoil action to lift out of the water, with a lithium ion battery, an electric motor and a propeller, controlled by a Bluetooth handset. The most powerful models can reach 35 miles per hour. On land they are somewhat cumbersome, weighing about 35 kilograms, and they can cost $12,000 or more, but they do look like good fun. The first eFoil came on to the market in 2017, and it seems that only a few thousand have been sold so far, but Zuckerberg’s endorsement has clearly encouraged an upsurge of interest in the technology. 

Other views

Robert Liew — Can wind power become truly carbon neutral? 

Gavin Thompson — China’s economic power surge 

Alexandre Araman — What lies beneath: why Middle East upstream resources are so advantaged 

Simon Flowers — Oil refining’s four big challenges 

Alexander Ward — Biden’s new Cold War with China will result in climate collapse, progressives warn 

FT View — Why a carbon border tax is a necessity 

Eli Dourado — The state of next-generation geothermal energy 

Uday Varadarajan et al — Creating an equitable and durable US climate policy 

Quote of the week 

“Ensuring Americans don’t bear a burden at the pump continues to be a top priority for the administration at large… That’s one of the core reasons why the president was opposed, vehemently opposed, to a gas tax and any tax in vehicle mileage, because he felt that would fall on the backs of Americans and that was a bottom line, red line for him.” — Jennifer Psaki, the White House press secretary, defended the Biden administration against charges that it was responsible for rising fuel prices, saying that it had spoken to Saudi Arabia and the UAE about the dispute in OPEC. She also reiterated the administration’s opposition to increased taxes that would raise the cost of motoring. 

Chart of the week

This comes from Robert Liew’s recent report on assessing life cycle carbon emissions of wind power, which he also adapted into an opinion column. It shows the relative contributions to those emissions of the different stages of a project’s life, from raw material extraction, to manufacturing, to installation, to operation and eventually disposal. You can see that the bulk of emissions come at the beginning of the life cycle, from producing the necessary materials, particularly steel and concrete, and manufacturing the turbines. Even with these emissions, the total life-cycle carbon intensity of wind power, in terms of grams of carbon dioxide equivalent per kilowatt hour produced, is only about 1% that of coal power.