THE Hunter region could be the biggest loser if Australian governments “remain in denial” about global energy responses to climate change, as key Asian markets show signs of a significant shift away from coal, says a report warning of a “chaotic” NSW transition without urgent planning.
Declining NSW coal exports since 2015 to key markets in Japan, China, South Korea and Taiwan; a dramatic drop in new and proposed coal-fired power plants in those countries; striking moves from coal to renewables in the past few weeks by some of Asia’s biggest banks, insurers and power plant developers, and increasing competition for reduced Asian coal markets were strong signs Australian coal exports face permanent decline, said energy analyst Tim Buckley in a report released today.
The Institute for Energy Economics and Financial Analysis (IEEFA) report examines the status of Australia’s biggest coal markets to conclude that “coal does not have credible numbers anymore and the risk to people and communities across NSW cannot be ignored”.
“Thermal coal exports out of the Port of Newcastle peaked three years ago and are now set to decline,” Mr Buckley said.
Australian governments needed to rationalise the NSW thermal coal industry in the short term to protect return on investment and prepare for a major downturn in export volumes, he said.
Assisting the Port of Newcastle diversify and shutting off any new coal mines like the Hunter’s KEPCO Bylong or the Central Coast’s Wallarah 2, which were at greatest risk of becoming stranded assets, had to be priorities, Mr Buckley said.
“The opening up of further thermal coal mining capacity will introduce more supply into a market that will shortly go into permanent decline. This needs to be avoided to maximise the value of remaining thermal coal production.”
The IEEFA report was released a day after NSW Energy Minister Don Harwin gave details of the NSW Emerging Energy Program at an industry event in Sydney. The program will support replacement of most of the state’s coal-fired power plants with renewable energy in the next 15 years, including the Hunter’s Liddell and Bayswater plants.
The program for a domestic transition from coal to renewables will support new large scale projects that use emerging and dispatchable technology such as wind, solar, biomass and pumped hydro, and with an emissions cap that rules out coal.
Mr Buckley, who was at the event, described the program as “really sensible and credible”. It ruled out retrofitting of coal-fired power plants and accepted the transition from coal to renewables is rapid and won’t be stopped, he said.
In his report on coal exports Mr Buckley rejected mining industry arguments that current high coal prices reflect a strong and growing industry. They instead reflect a lack of new supply caused by banks tightening environmental policies because of climate change concerns, he said.
He also rejected mining industry arguments that falling demand from the big four markets for NSW coal – Japan (44% in 2016/17), China (16.8%), South Korea (12.7%) and Taiwan (14.9%) – would be balanced by a rise in demand from smaller Asian electricity markets or India.
“Vietnam, Thailand, Bangladesh and the Philippines are tiny electricity markets compared to China, Japan and South Korea.. and will not be able to fill the gap, even though some are dependent on imports for their coal,” Mr Buckley said.
“They will inevitably install increasing amounts of cheaper and cleaner renewable energy going forward, which will undermine the viability of new coal plants.”
Mining industry arguments about India as a future coal market were “not aligned with stated Indian government policy or developments taking place on the ground” in that country, Mr Buckley said.
Only 0.4 per cent of NSW thermal coal exports went to India in the year to June, 2017, and the Australian Government’s Office of the Chief Economist has acknowledged the Indian government’s “policy remains focused on self-sufficiency”.
Central Electricity Authority data showed India’s largest operator of coal-fired power plants has already virtually eliminated coal imports, and the country’s two largest coal-fired power plants are switching to domestic coal or switching off because of a doubling of imported coal prices, Mr Buckley said.
The Australian coal industry also failed to note that India’s current coal plant pipeline has dropped by 79 per cent in just two years, in part because of the rise of cheaper renewable energy sources, he said.
The NSW Government’s 2016 long-term forecast for a 1.2 per cent per year increase in coal volumes for the next 40 years “looks hopelessly out of date” and is aligned with a 2014 Office of the Chief Economist forecast that failed to take into account global Paris Agreement commitments and progress in chief and efficient renewable energy, Mr Buckley said.
The state’s biggest thermal coal export market, Japan, would most likely deliver the shock to demonstrate governments need to act now for an orderly transition from coal, he said.
“I think we have already seen the warning signs of a systemic change in Japanese thinking,” he said.
“Any downturn in the level of Japanese imports will have a significant impact on the NSW thermal coal industry.”
In September Marubeni Corp of Japan, one of the world’s largest coal plant developers, announced it would no longer develop any new coal fired power plants, would double its investment in renewables globally to 20 per cent by 2023, and halve its coal plant exposure by 2030.
Japanese Prime Minister Shinzo Abe also announced he would chair the G20 in 2019 and make dealing with climate change a priority after almost 200 people died during extreme weather events in the past few months.
Mr Buckley said Asia’s rapidly developing offshore wind power sector could displace 300-350 million tonnes of thermal coal annually, or about 35-40 per cent of the global seaborne trade, and South Korea’s new sulphur content limit could hit Australian exports because less than a quarter of Australian coal met the new limit.
While China is currently constructing 76 gigawatts of new coal-fired power plants, almost 718GW of planned coal-fired capacity has been cancelled or shelved since 2010.
“The rapidly falling cost of renewable energy and batteries, combined with serious government efforts to combat air pollution, is set to reduce China’s reliance on coal. As the nation’s domestic coal industry rationalisation takes effect, it will be thermal coal imports that will be squeezed out first,” Mr Buckley said.
NSW coal is facing increased competition from the United States, South Africa, Columbia and Russia in Asia as European coal imports decline. Mr Buckley predicted there would be more Indonesian coal available for export than the Australian coal industry exports because of “headwinds faced by coal-fired power in Indonesia and the advance of renewables”.
New sulphur regulations in South Korea from May has coincided with a “significant” drop in Australian coal imports, and a 22 per cent rise in South African coal, Mr Buckley said.
He said 24 per cent of unused capacity at the Port of Newcastle is “set to grow over the next few decades”, and it was highly significant that port chairman Roy Green said the facility had to diversify away from its reliance on coal because “the long-term outlook for coal is a threat to the port and the Hunter region.”
“If the Port of Newcastle now has concerns about the long-term sustainability of the thermal coal export industry, it is time for the NSW government and the wider business community to show similar concern,” Mr Buckley said.
“An externally imposed downturn will hit NSW government revenues at the very time that demands for funding to support disrupted communities will grow.”
In response to the IEEFA report, NSW Minerals Council chief executive Stephen Galilee said “Things are looking good for the NSW thermal coal sector, with coal prices steady at around $114 a tonne compared to around $49 a tonne in January 2016”.
Mr Galilee said the Port of Newcastle was recording “record levels of coal exports”, with exports of NSW thermal coal to Japan rising by 2.4 per cent between December 2016 and December 2017.
Mr Galilee said the Japanese ambassador to Australia, Sumio Kusaka, told a Brisbane conference last week that Japan sought to “further strengthen cooperation with Australia to ensure the stable supply of coal moving ahead”.
Mr Galilee said the International Energy Agency’s most recent report said Southeast Asia and India would remain the primary growth centre of coal demand in the world to 2040, with consumption expected to more than double by that year, driven by an increase in demand for reliable and affordable electricity.
The IEA predicted coal’s share in the region’s power mix would increase from 35 per cent today to more than 40 per cent, Mr Galilee said.
Industry analyst Commodity Insights estimated Asian thermal coal demand would grow from 740 million tonnes in 2017 to 1147 million tonnes by 2030.