I recently asked Kevin Hansen if he could share some insights about what’s taking place in the coal markets. Kevin and his father James are analysts who run Ravenna Capital Management. They produce the weekly Master Resource Report which is filled with useful information about energy and markets.
I had the chance to listen in to a conversation at the ASPO convention in October between the Hansens and Gregor Macdonald about different energy trends including those within the coal markets. Kevin is a ‘coal guru’ so I appreciate him taking the time to share some of his insights into the coal industry.
To give some background, the big story is the rise of coal as a substitute fuel for more expensive and increasingly scarce oil. The story within the story is China’s galloping galloping coal consumption. China is the world’s largest coal producer mining 50% of the world’s coal. China has also become a major importer. China’s demand is hard to comprehend (Chart from EIA)
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Looking at China’s exploding consumption the question rises whether the increasing consumption levels can be matched by resource availability? Marketing would have us believe world- wide coal deposits amount to hundreds of years of reserves at current rates of consumption. Meanwhile, the hard data on reserves is either outdated or cornucopian speculations launched into an information void. Resource peakists suggest a ‘Peak Coal’ somewhat similar to Peak Oil, with production starting to decline in the medium term, perhaps sharply.
Climate scientists and proponents of coal conservation are hoping and praying for a sharp decline in coal production leading to its being phased out as a fuel as soon as possible.
Here is a summary of more or less current thinking from Euan Mearns at The Oil Drum last November:
The Chinese Coal Monster – Running Out of PuffPosted by Euan Mearns on November 20, 2010 –
In July of this year I wrote a story called ‘The Chinese Coal Monster’ drawing attention to the fact that China would soon account for 50% of global coal production and consumption. 10% per annum growth in Chinese coal is clearly unsustainable and I posed the question “How long can this go on?”
An article published in the Wall Street Journal earlier this week called ‘China’s Coal Crisis’ suggests the answer to this question is not much longer.
Policy makers [in Beijing] are mulling an annual cap of between 3.6 billion tons and 3.8 billion tons in the next five-year plan, running from 2011 to 2015, the state-run Xinhua news agency reported earlier.
A Nature publication called ‘The End of Cheap Coal’ by Heinberg and Fridley was also published this week. This refers to earlier work such as ‘Blackout’ (Heinberg), ‘Hubbert’s peak – The Coal Question’ (Rutledge) and ‘A global coal production forecast with multi-Hubbert cycle analysis’ by (Patzek and Croft).
Let’s begin with a few excerpts from the WSJ article:
State-run media reported that Beijing is considering capping domestic coal output in the 2011-2015 period, partly because officials worry miners are running down reserves too quickly to meet the needs of a rapidly expanding economy.Imposing a cap would be significant as China’s mining sector is already finding it hard to keep up with domestic coal demand, which has grown around 10% annually over the past decade.
So the cap has been set because the mining industry is finding it increasingly difficult to maintain and grow production.
In the three years to September 2010, Chinese companies spent $20.96 billion on overseas coal-sector acquisitions, according to Dealogic.Even if no official limits are introduced, China can’t keep growing coal output much beyond another decade, analysts say. The mining sector is constrained by chronic infrastructure bottlenecks, especially road and rail, and those coal deposits that are easiest to mine have already been tapped.
Experts are starting to predict when China’s coal reserves will run out—a nightmare scenario in a country where 70% of its energy is derived from coal.
This is a key issue. China may well have vast reserves remaining, but these may be further away, deeper down, thinner seams and lower energy content, and at some point it just becomes impossible to achieve what you achieved the previous year when so many variables work against you.
On the other side of the argument is Dave Summers (also @ The Oil Drum): who argues there is plenty of coal to be had at a price:
The story is told in the difference between the resource and the reserve. At the present time folk would have you believe that the UK has very little coal left (4.5 years according to the BP report, from 2005, which suggests that the country is only staving off running out, since it is using about a quarter of that a year, by relying on imports).So where did the coal go? Did some evil Voldemort-type character sneak into the country over night and magic it away? No! As the World Coal study shows, the coal is still there. It is just that, at the present time, the coal is not economically mineable and so it is not considered a reserve. It is, however, physically, still there, and thus, is still shown in the first column as a resource. And as the price of oil rises and the price of alternate fuels rises, so more of that resource will become a reserve. As a single example there has been talk of putting a new underground mine in at Canonbie in Scotland as part of a long-term plan to supply the Longannet power station.
It is thought that deep seams run for miles underneath the Canonbie area and could yield 400 million tonnes of coal, enough to keep the Longannet power station going for the next 80 years.
You may note that the 400 million ton figure is twice the volume that BP considered the totality of the British Reserve in 2005.
The predictions of the imminent death of the Coal Industry are likely thus to be somewhat premature.
This is followed by Luis de Souza’s article which makes another argument, etc …
I asked Kevin what his views of coal production and how some of this will play out:
Kevin:
I will try to answer your questions as best I can while trying to avoid to much minutia of which I tend to fall into. The coal market has over the last few years become to me one of the most exciting in the energy arena and as a result has been the focus of a great deal of my efforts.
On a global scale the coal market faces regulatory and infrastructure constraints rather than the geologic constraints that face the petroleum industry. I am not a believer in the “Peak Coal” line of thought that has been making the rounds recently in the Peak Oil community that supply will peak in the near future. Though there has been a great deal of work done analyzing the decline of the heat content of coal produced in the United States and the more pronounced decline in coal production in the UK those two examples reflect in my opinion non geologic constraints. While in the latter case of the UK it may be somewhat geologic you and I can both agree there is almost no chance that the British government is going to green light an open pit mine in the UK at this point even if coal prices rise to an economic level (see gold explorers attempts to get licenses in Scotland).
At the same time US production is restrained by environmental concerns in the East (see Arch Coal recent loss of a mountain top removal license) to rail and export capacity constraints in the West. Currently here in Washington State environmental groups are fighting Arch Coals attempt to export out of the Columbia river. That being said those are the developed coal markets and to a large extent the real action is going to come from Africa, which to this point is ill explored from a coal standpoint. Current activity in Mozambique by both Vale and Riverdale Mining (shortly to be part of Rio Tinto) is aimed at putting 100 plus million tons of coal per annum onto the seaboard market. I could go on and on about expanding capacity in Indonesia, Colombia, or Australia, but to some extent that misses the real question of, will it be enough?
Sadly I think the answer is no… The numbers are simply too massive, so that means only one thing, price will rise as supply is constantly outstripped by potential demand. Now again this is assuming that “growth” continues and that the lack of energy does not lay the economy low. If the economy is restrained on a global basis coal will simply fill the gap for our other depleting energy resources.
As for your questions about China (of which the same goes for India) my rule of thumb is this… The impossible can not continue forever and I truly believe that what is going on in China currently will end and I do not think in a good way. While China can build twice as many coal plants as it currently has it will not be able to transport that coal to those location under the current system or any system I can imagine (moving coal by truck as apposed to rail, see last summers month long traffic jam on the way to Beijing). But, the best thing about the Chinese is that by god they’ll try and it will be amazing to watch because for a while it will probably look like they are pulling it off.
Unfortunately, at some point the system will break and I have no idea what the catalyst for this is. Until this happens though, the Chinese are going to suck up ever ton of coal that they can get their hands on from every corner of the globe that they can reach. So while supply will continue to increase from China’s standpoint we have hit a level of “Practical Peak.” Though not as Apocalyptic as constantly decreasing supply it could be just as destructive. It will be very interesting to see what they do given the “treadmill to hell” mentality of the Chinese government (i.e. the people only tolerate the toxic water/air and general oppression because things are getting “better”).
So, looking at domestic US electricity consumption I tend to fall into the Jeff Rubin camp of thinking that while painful the US economy will rebalance as some of our lost manufacturing returns. This will of course raise domestic electrical consumption. That trend coupled with our ever expanding desire to plug our cars into the wall should sop up most of our excess capacity. I find it interesting that many of the coal plant closures that are being planned do not take affect until around 2020 by which time I would expect some of these trends to have taken root. I am of the belief that while new plants may not be constructed older plants may not be decommissioned as planned (along the lines of the extend lives granted to US nuclear facilities).
As for the metallurgical coal market the US is in many ways unique. Since a large portion of our domestic steel capacity comes through Mini Mills and recycling we do not have the same demand profile as emerging Asia where everything is iron ore based and brand new. As domestic export capacity expands I expect that met coal will slowly drift towards the seaborne price. Though this trend could take years.
Coal to liquids (CTL) is an interesting concept and I think one that has been dismissed too quickly. Not that I think CTL is a good idea from either an environmental or long term economic standpoint, but I think it will happen on some scale. Much like coal to gas (CTG) I think that CTL will play a role where water (since it takes a lot) and low grade or stranded coal are plentiful. I know the Sherritt International in Canada has toyed with the idea in some of Canada’s low grade lignite fields. Though they have not moved ahead it would not surprise me to see them do so given the disparity between that grade of coals cost and the value of coal derived diesel. CTL is a great example of one of the many stupid things we will do to alleviate the effects of peak oil.
The powers that are in the coal market will increasingly be dominated by those companies that develop and those countries that possess a large number of tier 1 projects. As the import needs in Asia continue to rise countries like the US, Australia, Canada, Indonesia, Colombia and parts of Africa will increasingly be able to turn the lights off around the globe if they so chose. Since steam coal is considerably less volatile than met I expect that pricing will move to shorter and shorter contracts forcing more volatility through to the final product electricity.
At the same time it is doubtful that the domestic prices in the aforementioned countries will rise as quickly or be as volatile since domestic potential supply will always outstrip (for the foreseeable future) export capacity.
With respect to Shale gas I do fall into Art (Berman’s) camp about current economics and the oversell by the industry on the “potential.” If the price of natural gas triples or quadruples then that changes the whole game, but that is not now.
Well it will be interesting to see what happens, coal was a regional market… Not any more.
Thanks, Kevin!