PERTH (miningweekly.com) – Despite its efforts to limit coal consumption and focus on alternative fuel sources, China’s thermal coal demand was expected to double by 2030, analyst Wood Mackenzie reported this week.
In a paper titled 'China: The Illusion of Peak Coal', Wood Mackenzie reported that the Asian major’s demand would grow to around seven-billion tons a year of thermal coal, which was contrary to speculation that China's thermal coal demand may reach a peak in the next decade.
“It is very unlikely that demand for thermal coal in China will peak before 2030,” said William Durbin, Wood Mackenzie’s Beijing-based president of global markets.
“Why? Because China’s aggressive investment programme for nuclear, natural gas and renewables capacity is centred in the coastal region while coal-fired capacity grows in the central and western provinces. Indeed, there are also a plethora of coal-intensive conversion projects being built or planned that are significantly adding to demand.”
Durbin noted that Wood Mackenzie’s analysis already took into account a rapid improvement in energy efficiency, the likes of which had not previously been seen.
“We expect power demand per unit of gross domestic product (GDP) to fall by half in just 17 years, an extraordinary achievement for an economy experiencing such sustained growth. In spite of this efficiency improvement, power demand is still set to nearly triple to 15 000 Terawatt hours (TWh) by 2030. Indeed, if expected efficiency improvements do not materialise, then in the absence of alternatives, coal demand could increase further.”
Durbin pointed out that coal was an important natural resource for a number of provinces seeking investment, jobs and tax revenues, adding that already there were government-approved coal conversion projects accounting for over 0.25-billion tons a year of thermal demand.
Additionally, there were planned projects that will increase demand by another 0.6-billion tons a year.
“Total Chinese industrial demand for thermal coal is expected to grow from 1.5-billion tons a year to nearly 2.1-billion tons a year by 2030. In comparison, the US, the world’s second-largest domestic market for coal, consumes only one-billion tons a year in total. If a cap on coal consumption in China is imposed, it will come at a cost to provincial economies.”
In order for China to reduce power-driven demand for coal, a significant increase in the availability of natural gas for the power and industrial sectors was required.
However, Wood Mackenzie believed that natural gas supplies would struggle to meet demand growth, owing to modest investment in conventional reserves and the very slow development of domestic unconventional shale gas reserves.
Additionally, the high cost of liquefied natural gas and pipeline imports was uncompetitive with low-cost coal.
Durbin noted that China’s gas price and power tariff regulations would need to be reformed in order to create incentives for the national oil companies (NOCs) to make expensive investments in unconventional gas.
“Our analysis already assumes an intensive investment programme in unconventionals post-2020. To ramp-up shale gas developments and production faster to displace coal will require a near doubling of investment. We expect coal to hold its cost advantage until shale gas breakeven costs fall by 40% to 50%.”
Aside from coal substitution by natural gas, China hoped to reduce coal usage in the coastal demand centres by building ultrahigh voltage (UHV) electricity transmission lines from the north-west and south-west.
Wood Mackenzie's report noted that this would have a limited impact on coal demand. The transmission lines from the north-west would transmit coal-fired generation; hence, it just moves coal demand from the coast to the interior.
The UHV lines from the south-west will transmit seasonal hydro, requiring baseload coal when hydro output falls. The net effect of the UHV lines and the noncoal-fired capacity is a flattening in thermal coal demand in the coastal power region.
“Government mandates to improve the environment by reducing coal use will require steep investments in alternatives, the use of emission control technology or reduced economic growth rate targets - options which are not currently happening,” Durbin said.
“But what is noteworthy, however, is that there is greater potential for further demand growth beyond our expectations. Failure to meet an aggressive noncoal-power capacity build, investment in more efficient technologies and the expansion of the UHV network will increase the dependence on and use of coal. In the end, China's thermal coal demand will see persistent growth until 2030, rendering peak coal an illusion.”