Tuesday, 10 June 2014

Rapid Chinese coal demand decline may strand Australian assets

Rapid Chinese coal demand decline may strand Australian assets

Rapid Chinese coal demand decline may strand Australian assets

As PM Abbott isolates Australia from climate change
action and plugs fossil fuels, news emerges that Chinese coal
consumption is falling much faster than forecast, potentially leaving
Australia's coal assets stranded in as little as five years.
Alex Kirby from the Climate News Network reports.

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

Peak sooner

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
  • Strong predicted growth for China’s renewable energy technologies and other non-coal power sources.
By 2020, the difference between a business-as-usual path and a
trajectory towards such an early peak from a combination of these
factors equals 56% of China’s thermal coal supply in 2012.

Put another way, it represents 437 GW of coal-fired power capacity —
40% of total capacity in 2020. This shows, the authors say, that there
is significant potential “asset stranding” – this happens when an asset
has become obsolete and is depreciating – as a result of
lower-than-expected demand within China’s thermal coal sector.

The report’s warning is aimed not only at investors in China’s coal
industry. It says the changing dynamics of the country’s power sector
also pose a risk to international coal exporters who are prepared to bet
that China’s apparently insatiable demand for coal will continue.

The authors say that if China’s import demand decreases rapidly, that
would require exporters to find another market or be left with stranded
assets. They say this risk applies especially to Australian and
Indonesia exporters.

The report contains recommendations for investors and policy-makers,
and says there is an opportunity for China and other countries to ease
the potential disruption and risks associated with stranding assets.

It wants investors and financial institutions with significant assets
at risk to be supported in developing a plan of action for managing the
stranding process.

Jessica Robinson, ASrIA’s chief executive officer, said:

“Investors need to dispel any belief that Chinese coal demand is
insatiable and integrate this transition into their decision-making by
stress-testing the relative risks of different future demand scenarios.”

Price forecasts

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

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. 

~ Climate News Network

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