Published on Jan 11, 2016
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With an estimated 1.6 million Chinese people dying each year as a result of breathing heavily polluted air the Chinese government has announced its goal to reduce coal-fired power emissions by 50 per cent over the next five years.
In mid-December 2015 the level of pollution in Beijing soared five times higher than the World Health Organisation’s maximum recommended limit, prompting the government to issue an environmental red alert.
Schools closed and traffic restrictions were enforced, and the government ordered more than 2,000 factories in and around the city to significantly reduce or cease production entirely in an attempt to limit the population’s exposure to the deadly air.
It’s all about China
Public safety aside, pressure on the coal industry is driven largely by two main sources – policy decisions and demand.
When it comes to demand, China’s impact cannot be downplayed as the International Energy Agency (IEA) reports it represents half of global coal consumption.
Changes to the Chinese economy and power mix prompted the IEA in its Medium-Term Coal Market Report 2015 to slash its five-year estimate of global coal demand growth to 0.8 per cent per year. In real terms this means a reduction of more than 500 million tonnes to 2020.
The report notes for the first time in a decade China’s GDP growth did not have a one-to-one relationship with electricity demand growth causing a direct impact in coal consumption. Coal-fired power was further sidelined by 55 gigawatts of renewable energy coming online in 2014 and an unusually high level of rainfall which boosted hydro electricity production by 100 terawatt hours.
What does this mean for Australia?
Policy changes across the globe are likely to begin to filter through following the universal, binding agreement reached at the recent Paris climate talks where 195 nations agreed to limit global temperature rise to below two degrees Celsius this century.
So what does this mean for Australia, which has 8.6 per cent of the world’s coal – the fourth largest reserve in the world?
Subdued market predictions for Australian coal are mostly unanimous across the board. World Bank and International Monetary Fund economic projections show stagnant pricing over the next five years. UBS recently downgraded its long-term price forecasts for thermal and metallurgical coal by 33 and 20 per cent respectively.
Within our region it is expected India will increase coal consumption in the coming years, with some holding out hope this will bolster demand for Australian coal. However, it should be noted India itself holds the world’s fifth largest coal reserve and has the capacity to supply much of its own demand with cheaper, albeit dirtier, domestic coal.
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