Coal Consumption: The China Syndrome  

The Australian has a WSJ article on the ripple effect of rising Chinese coal consumption (and that of other countries) as energy demand grows and countries turn to the cheapest and dirtiest energy source available.

CHINA is doing for coal what it once did for oil: helping push prices to new highs, adding more pressure to the creaking global economy.

The east Asian giant has long been a huge supplier of coal to itself and the rest of the world. But in the first half of last year, it imported more than it exported for the first time, setting off a near doubling of most coal prices around the world.

The surging prices were given a further boost late last month when a winter of punishing snowstorms and power shortages led Beijing to suspend coal exports for at least two months.

Since then Asian prices have shot up a further 34 per cent. Last week, coal benchmarks hit all-time highs in the US, Europe and Asia.

"The velocity of the change has been remarkable," says Tom Hoffman, senior vice-president for external affairs for US-based coal supplier Consol Energy, which he says is considering holding off on some commitments to supply coal to see if prices rise even further.

The result is similar to what happened after China became a net importer of oil in 1993 but the Chinese factor is unfolding much faster with coal. It wasn't until China's industrial development shifted into overdrive this decade that the nation began to shake global petroleum markets.

Oil's big price surge came after widespread brownouts in China in 2004 forced factories there to buy diesel fuel for backup generators, increasing the country's foreign oil demand.

China's need for coal is rising as other factors around the world are putting severe strain on supply. Flooding at major mines in Australia since mid-January has dramatically stunted a major coal producer's exports to Asian markets. Power shortages and blackouts in South Africa amid rising demand there have curtailed exports to Europe. In Russia, another major coal producer, rail-car shortages have frustrated attempts to meet growing world demand.

Demand is rising quickly elsewhere. Japan, one of the world's biggest importers, is burning even more coal since an earthquake damaged a nuclear reactor last year, doubling one utility's coal intake.

Longer-term pressure comes from India, which has mounted a major expansion of coal-fired electricity plants that is driving up the country's coal imports despite its large reserves.

Indonesia has been moving during the past year or so to divert more of its coal stores to domestic use, as the coal industry there has been depleting its higher-quality coal reserves.

Even US coal producers are increasing exports to Europe, as buyers who for years were uninterested in American coal are now scrounging for supply. ...

To be sure, some of the factors boosting coal's price are temporary. China's worst snowstorms in 50 years have both increased demand and hampered delivery from coal mines in northern China to power plants across its southern and western regions.

China has been closing down unsafe and inefficient coal mines, restricting supply until enough new or refurbished mines can be opened. And China has freed domestic coal prices to rise with demand but has capped electricity rates. That led power plants to order less coal - leaving them short when the storms hit.

But it isn't clear how long Beijing could take to reopen more mines or correct its market imbalances. Other factors driving up prices aren't likely to change soon. Chinese coal demand grew nearly 9 per cent last year, raising the nation's share to a quarter of the world's consumption. Its coal industry roughly doubled output from 2001 to 2006, but growth slowed to about 6 per cent last year, not enough to keep pace with demand. Five years ago, China exported 83 million more tonnes of coal than it took in. Last year, that surplus fell to 2 million.

The rapid loss of more than 80 million tonnes in exports amounts to about 12 per cent of the internationally traded market. This year will be worse, predicts Gerard Burg, minerals and energy economist at National Australia Bank, who calculates China will become a net importer of 15 million tonnes.

Coal was assumed by many in the energy industry to be immune to worries about the stability of supply that have helped push oil to record highs. Reserves are more evenly distributed around the world, and most of the world's coal is consumed where it is mined. Coal prices enjoyed a bull run in 2004 and 2005, but today's boom is bigger and is causing more concern, as the possibility of a global recession looms and oil trades at around $US90 a barrel.

Coal reserves are still relatively plentiful worldwide. But expanding the infrastructure to mine and transport them in developing countries is slow and expensive - and those countries' consumption is rising. India increased production by a third from the late 1990s to 2005, according to the BP Statistical Review of World Energy, while its consumption rose by roughly 40 per cent. Russia plans to double its coal consumption, says US Global Investors, in part to free up natural gas for lucrative export to Europe.

As recently as 2003, China was a critical coal supplier to many Asian neighbours such as Japan. But around that time, China's economic expansion began to accelerate sharply, especially in heavy industries that guzzle electricity. Coal exports began to dwindle and imports rose.