Coal investors face a multi-layered and unavoidable challenge: markets distorted by war, trade constraints and the existential threat of the energy transition.
Our recent Global Coal Forum explored the forces shaping the future of the sector. Across a two-day event, our experts dug deep into geopolitical shifts, the gathering pace of the energy transition and the technologies upon which decarbonisation will rely.
Missed the forum, or looking for a recap? Fill in the form to access Kaho Yu’s presentation on the impact of the war in Ukraine – and read on for eight talking points from across some of the key sessions.
1. The Ukraine crisis has stirred up energy geopolitics, highlighting the dilemma of energy security vs energy transition
The fractious geopolitics of energy is not set to ease any time soon amid a widening global division on energy transition and supply insecurity driven by the Ukraine crisis.
Energy insecurity has sped up energy transition in Europe but pushed Asian countries to remain coal-dependent. Geopolitical factors from big-power confrontation to sanctions will continue to dominate coal trade policy.
2. High energy coal prices are likely to remain elevated while sanctions on Russian coal remain in effect
Rory Simington, Principal Analyst, Asia Pacific Thermal Coal Research:
A combination of increasing demand for higher energy coal, lack of investment and looming gas shortages meant the coal market was under stress before Russia’s war with Ukraine even started.
The impact of sanctions will be significant as Russia supplies over a quarter of the high-energy coal in the global market. Sanctions will divert this coal into markets that don’t usually take it – leaving European and North Asian markets short of premium material.
3. Low-carbon technologies – such as co-firing and CCUS – will be critical for a less disruptive transition
Shirley Zhang, Principal Analyst, APAC Coal Market:
In our accelerated energy transition scenario (AET-1.5), in which the rise in global temperatures since pre-industrial times is limited to 1.5 °C, global seaborne thermal coal demand would be 68% lower than our base case by 2050.
The gap is defined by the pace of large-scale commercialisation of green and low-carbon technologies that are still in their infancy today. Import-dependent economies will have to consider all innovative technology options to mitigate energy security risks in their net zero pathways.
4. Metallurgical coal exporters ponder new horizons as traditional price relationships invert
Robin Griffin, Vice President, Metals and Mining Research:
Collapsing demand and supply improvements have seen premium hard coking coal (HCC) prices revert below US$250/t with more weakness to come. Prices could soon very well meet an inflated cost curve.
Unique premia for thermal coals should signal a turnaround, and diversion of metallurgical coals into the power sector has already begun in earnest. But quality and uncertainty will limit the shift, and its impact on markets. As difficult as it is to imagine, a prolonged price inversion looks to be in the offing.
5. Investment in new coal supply remains underwhelming as miners continue to reward shareholders
The outlook for capital investment in coal (ex. China) is for a near 20% fall in 2022, with a greater reduction in thermal coal. If record high prices do not incentivise more capacity, the investment outlook could become increasingly uncertain when prices eventually fall.
With Australia occupying a large share of the project pipeline, some new supply will make its way to market. However, we remain cautious on supply as miners deploy cashflow to repay debt, return capital to shareholders or consider diversification options.
Labour shortages will also limit growth in the near term, and add to broader capital and opex cost pressure from fuel, electricity and consumables.
6. The steel industry must abate north of 90% carbon to achieve net zero emission by 2050
The steel industry emits 3.3 BtCO2e annually – 7% of global emissions. Steelmakers must capitalise on new, low-carbon opportunities en route to the immensely challenging 1.5°C pathway. The supply landscape requires a structural revamp. The electric arc furnace (EAF) and blast furnace (BF-BOF) route must undergo a role reversal, with EAF accounting for three-fourths of global production by 2050 (three times current levels).
In terms of primary metallics, green hydrogen-based direct reduced iron (DRI) and scrap will blaze a trail. Hydrogen-based steel shall comprise more than a quarter of global steel output. Carbon capture and storage would be essential, but its role could diminish beyond 2040 due to limitations on capture rates and the rising penetration of new technologies.
Given the high lead times, change and green investment must begin now.
7. The future of the metallurgical coal trade is intrinsically linked to the success of steel decarbonisation
Growing pressures are mounting to reduce global carbon emissions with particular impacts on metallurgical coal’s role in tomorrow’s steel industry. But the question is by how much?
Under our most aggressive steel decarbonisation scenario, long-term demand for metallurgical coal is slashed by over 60% with hydrogen injection impacting pulverised coal injection (PCI) coal proportionally higher. How deep steel emissions are ultimately reduced drives the long-term fate of hot metal production and demand for coking coals and PCI.
8. Hydrogen will eventually displace coal in power and steel in Asia Pacific
As countries race to net zero and low-carbon hydrogen costs fall, hydrogen will displace coal in steel and power – either directly or in the form of derivatives such as ammonia. (Green hydrogen is set to reach parity with grey and brown as early as 2035 in countries like India and China.)
This displacement will make the Asia Pacific region the largest consumer of low carbon hydrogen by 2050, with a combined demand from steel and power alone of 40 Mtpa.
Take a closer look at the forces shaping the future of coal
Fill in the form at the top of the page to access a complimentary replay of Kaho Yu’s presentation on the impact of the war in Ukraine.
Source: Wood Mackenzie
