China Coal Cap Could Strand Assets

Analysts believe that China - the world’s largest producer and consumer of coal, accounting for almost half of global consumption - could be close to making an abrupt and drastic change of track.

A report by the Carbon Tracker Initiative and the Association for Sustainable and Responsible Investment in Asia (ASrIA) says that when China’s demand for thermal coal (cheap coal burned in power stations to generate electricity) peaks, this will leave up to 40% of its coal-fired power generation capacity potentially useless - and that could be in barely five years’ time.

Thermal coal currently provides just under 80% of China’s power, the report says, with up to US$21 billion spent annually on the sector’s assets.

But some forecasts suggest China’s thermal coal demand will peak between 2015 and 2030.  The report says that that peak could be reached sooner rather than later - perhaps by 2020.  It suggests four possible reasons:

• Slowing GDP growth and decreasing energy intensity reducing growth in China’s demand for power;
• Policy responses to the air pollution and water scarcity crises reducing the attractiveness of coal as a fuel;
• Pilot emissions trading schemes and discussions about a carbon tax increasing the perceived risk to the future cost competitiveness of coal power;
• Strong predicted growth for China’s renewable energy technologies and other non-coal power sources.

Luke Sussams, Carbon Tracker’s senior researcher and the report’s lead author, said:

Investors in Australian and Indonesian exporters of coal, in particular, must factor much lower Chinese demand into their demand and price forecasts.

If China becomes a zero imports market, which is possible, there is a noticeable lack of any viable alternative growth market for seaborne traded coal.  Where will Australia’s US$50bn of thermal coal go instead?

China aims by 2020 to produce at least 15% of its energy from renewable sources. Chinese companies invested $65bn in renewable energy projects in 2012 - an increase of 20% on 2011 investment - and they plan to spend $473bn between 2011 and 2015, according to the country’s Five-Year Plan.

In 2011, China was the world’s second-largest wind producer, and it is also investing in solar power, hoping to increase capacity by almost 12 times from 2012 to the end of 2015.

China Coal Cap Could Strand Assets