A scan might have found the cancer now killing Daniel van Roo. Instead his doctor gave him 50 STI tests, which van Roo believes was because he is gay.If I hadn’t taken action and if I hadn’t seen a doctor then, you know, then where I am is just where I am. But because I did do those things, I am probably going to be upset about it when I am laying in the hospital bed at the end.
China’s coal price cartel
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“The member from Groom, Ian Macfarlane, was the resources minister who scrapped the mining tax. It was a magnificent achievement…” Abbott said. “I hope this sector will acknowledge and demonstrate their gratitude to him in his years of retirement from this place.”
Like the minerals industry, we’ll get back to that shortly. First: the coal price.
For the past five years, a lot of people concerned about climate change have watched the trajectory of coal prices with the kind of glee that Sydney realtors feel as they watch the trajectory of house prices.
The difference being, of course, that the trajectory of coal was going the other way, and even faster.
From a peak of almost $US142 a tonne in January 2011, the benchmark price for Newcastle thermal coal – the kind used in greenhouse-gas-producing power stations – slid to below $60 in September last year. This January, it bottomed out at $53.37.
Oh, the joy in the hearts of the greenies. And it was all the more intense because coal was tanking everywhere around the world. Those carbon-price-killing, tax-avoiding multinationals were taking a huge hit. In April the largest coal company in the United States, Peabody Energy, filed for Chapter 11 bankruptcy. In May its Australian subsidiary reported a consolidated net loss for 2015 of $2.7 billion. Cascade Coal’s share price fell from $7.35 in early 2011 to 35 cents in February.
Rio Tinto announced it was selling its big Blair Athol mine in Queensland for $1, although the word “selling” hardly seemed apt, given that as part of the deal it agreed to cover the $80 million rehabilitation bond on the mine. All over the country, coalmines were being mothballed or sold at knockdown prices as the big mining companies scrambled for the exits.
Low coal prices also meant that a host of proposed new developments became uneconomic. The proposed mega-mines of Queensland’s Galilee Basin or Shenhua’s Watermark in the rich Liverpool Plains in New South Wales, to name but two examples, would not turn a buck at the prevailing coal price, according to many analysts. Banks deserted them. Hundreds of billions in coal investment was put on hold.
The divestment movement also was gathering pace, suggesting that people and institutions dump their shareholdings in fossil fuel companies as a matter of financial prudence, if not conscience. A lot did. At the same time as Abbott was praising Macfarlane, 350.org was welcoming Monash University to the growing ranks of divestors, noting it joined “more than 500 institutions, representing $3.4 trillion globally, who have committed to sell their investments in coal, oil and gas companies”.
It seemed like the most significant progress towards the vital goal of decarbonisation was happening outside government, at least in this country. Australia paid superficial obeisance to international efforts to mitigate climate change, but state and federal governments continued to support the coal industry via subsidies and woefully inadequate carbon pollution reduction targets.
The frustrating fight against governments deep in the pocket of the fossil fuel industry continued, but in the meantime, big coal’s opponents cheered for the market economy – an unusual phenomenon on the political left.
By the middle of this year, it looked like peak coal was already several years past, and we were approaching peak schadenfreude.
But then came the reality check. The price of thermal coal, which had bobbled about within just a few dollars of the record lows of January for five months, suddenly zoomed upwards.
In July alone, the price jumped more than 17 per cent. In August, it moved another 8 per cent, to more than $US72 a tonne.
As of this week, it still was sitting above $US71 for thermal coal, up more than 40 per cent from its January low.
Metallurgical coal, used in steelmaking, was up a staggering 158 per cent, to more than $200. But it is not our focus here, for it is not in competition with renewable energy for power generation.
Things are looking up for coalminers. Share prices are climbing again. Whitehaven, for example, is back up from 35 cents to $2.58.
There is reason to believe, however, that they won’t be doing it for long. China, which consumes almost half the world’s coal, is in the process of formulating a plan to drive prices down permanently by creating what industry analysts call a “buyers’ cartel” for coal.
For now, though, it is the industry that’s gloating.
The Minerals Council of Australia took aim at the critics in a media release a couple of weeks ago, saying the recent price rises had shot “a gaping hole in their previous economic prognostication that the industry was in terminal decline due to the uptake of other energy sources”.
It said: “The significant economic expansion occurring in Asia is heralding a large-scale build of clean efficient coal-fired power plants, the likes of which we have never seen before. Some 725 units are already operating with an additional 1142 units under construction or planned. To put that in perspective, the new build represents over 32 times Australia’s current coal-fired capacity…”
As Greg Evans, the executive director of coal for the Minerals Council, told The Saturday Paper, the industry’s opponents had misread the situation by focusing on coal prices rather than export volumes.
“While prices have been under pressure in the past several years, export volumes have increased and Australia has regained its position as the world’s largest coal exporter,” he says.
“With lower prices the domestic industry implemented productivity improvements and some higher cost operations were scaled back. However, looking ahead, the volume outlook remains strong with organisations such as the International Energy Agency forecasting Australian coal exports will increase by 37 per cent to 2040.”
If you accept the reality of climate change, these are alarming figures. Even if new “clean” power plants reduce carbon dioxide emissions, we’re still looking at a massive increase in greenhouse gas emissions.
But let’s deal with the immediate question: Why the recent sudden spike in the coal price?
In a nutshell, it’s down to a bureaucratic stuff-up, according to many industry analysts. A stuff-up of a magnitude only possible in the centrally controlled economy of China. They simply cut domestic coal production too quickly, which meant they had to buy it elsewhere, which pushed up the price.
But the likelihood is that this mini-boom won’t last very long.
Indeed, it may be over already.
Bloomberg Markets reported last week that China’s biggest producer, Shenhua, along with other smaller domestic miners, would lift output dramatically this month as part of a government-co-ordinated move to force down prices.
The plan could have far-reaching consequences, not only for the future of the Australian coal industry but for global efforts to mitigate climate change.
The first thing to understand is that China is not nearly as dependent on Australian coal as many of us would like to think.
China produces almost half the coal dug up in the world. It also accounts for almost half the world’s coal consumption. It’s quite capable of meeting its own requirements, usually. But around the time of the global financial crisis, it temporarily couldn’t dig it up fast enough to meet its requirements, so it had to import. The price shot up and Australian miners enjoyed a boom.
In recent years several things have happened to change that. No. 1, China’s overall rate of economic growth has slowed. No. 2, its economy has shifted away from investment and manufacturing towards consumption and services, which are less resource intensive. And No. 3, it has got serious about renewable energy – way more serious than our government.
Already close to a quarter of the world’s renewable power is generated in China, and it continues to add capacity at a staggering rate.
“All the increased demand in China now is being met by a combination of nuclear, hydro, wind and solar,” says Tim Buckley, Australasian director of energy finance studies for the Institute for Energy Economics and Financial Analysis. “It’s happened faster than anyone predicted, including me.”
Faster even than some Chinese authorities expected, apparently. As a result, new coal generators still are being built.
Only last year, provincial governments gave approval for a record number of new coal plants – 210 of them – into an already oversupplied electricity market.
In response, in April the central government’s energy planners put in place a new policy which, according to a recent Greenpeace analysis, will see the cancellation of new projects and retirement of existing plants with a combined generating capacity of 180 gigawatts by 2020, a figure that matches the entire operating coal-fired capacity of the European Union.
Even so, China would still have excess capacity of at least 400GW, which the report said would be a wasted capital expenditure of about $US200 billion.
Says Buckley: “The utilisation rate for coal-fired power stations is now 47 per cent, which is to say the average plant is now running only every second day.
“On the one hand, they’re expanding capacity at a furious rate; on the other, utilisation is collapsing. They have realised they don’t need any new generation from coal. Ever again. So they are cancelling.”
As the need for coal-fired power falls, so does the need for coal, so the Chinese government also has been working at cutting mine production.
“The current problem is simply that the Chinese government cut too much production too quickly,” says Buckley. “So imports went up 30 per cent in August, by volume.”
As Bloomberg energy analyst David Fickling characterised it: “While domestic mine workers are being put on reduced hours or laid off, and are disturbing public order by going on strike, foreigners are making outsized profits.”
And so last week China’s central economic planning body, the National Development and Reform Commission, called together the relevant stakeholders to work on a scheme to ensure it never happens again.
“China is trying to create a buyer’s cartel in the coal market, an outcome that could be quite as bad for producers of the fuel as the OPEC seller’s cartel was for consumers of crude oil in the 1970s,” Fickling concluded. “With imports by South Korea and Japan also looking fragile, the Pacific’s coal exporters should make hay while the sun shines. Winter is coming.”
Other analysts, including IEFFA’s Buckley, see the same future.
“The price is $US72 today. The Chinese are clearly saying they want a price below $US60, and they will adjust domestic production to get it.
“That allows their domestic coal industry to go through a relatively orderly downsizing, [while] imports of thermal coal continue to decline. My prediction is they will go to zero by 2020, and China may even become an opportunistic net exporter.”
That’s bad news for Australian coalminers, but not necessarily good news for the global climate.
There is a dilemma here. Low prices discourage miners, but they encourage the construction of coal-fired power stations by lowering the cost of their fuel.
Which brings us back to the claim by the Minerals Council that new coal-fired power stations are being planned or built at an unprecedented rate.
Closer inspection shows that more than 80 per cent of the extra capacity they are heralding is in China. And China, as we have seen, is cancelling or retiring those plants.
The Australian coal exporters’ next biggest hope is India. But, says Buckley, “India is replicating the Chinese electricity market transformation, but getting there far faster.
“For the first five months of this year, the average utilisation rate of Indian coal-fired power plants was 52 per cent. In August it was 47 per cent, a record low.
“Energy Minister [Piyush] Goyal has repeatedly said they need to cease building coal-fired power pants. Tamil Nadu, the southern state, just last weekend announced the cancellation of a 4000-megawatt coal plant development. It’s now a state of electricity surplus.”
The same thing will happen in Australia’s other export markets as countries invest in renewables, Buckley says. He also questions the rosy International Energy Agency forecasts for Australian coal exports, noting the historically bullish forecaster Wood Mackenzie’s prediction that Australian exports will fall 35 per cent in volume and 40 per cent in per-unit value.
One point on which he does agree with the Minerals Council’s Greg Evans, however, is that the volume of the coal consumption is a more important measure than the price. And global consumption was flat in 2014, then fell by almost 3 per cent last year, and is on track to fall another 3 per cent this year.
It’s a good start, but the change still is not happening nearly fast enough to meet greenhouse gas reduction targets.
The chief economist for The Australia Institute, Richard Denniss, maintains further measures are needed to push up coal prices.
“Low prices are bad,” he says. “You can’t tackle climate change with low coal prices. The environment movement spent 30 years pushing for a carbon price to make coal-fired power more expensive. In the last five years they’ve been getting so much schadenfreude from watching coal companies go broke that they’ve forgotten they once wanted a high price.”
The solution is not to leave change up to market forces, he says. “The solution is regulatory. We just need to ban new coalmines.”
There’s little chance of that happening in Australia, though. The coal lobby is too powerful, too politically connected. Which brings us back to where we began.
On Monday it was announced that Ian Macfarlane had been appointed as the new chief executive of the Queensland Resources Council, which makes him essentially the chief lobbyist for the industry.
He had been the country’s longest serving resources minister when six months ago Tony Abbott told the sector to “demonstrate their gratitude” to him in retirement.
They certainly did that. Macfarlane’s salary is understood to be $500,000 a year.
He denied any impropriety. “It doesn’t [breach the code of ministerial standards], the QRC is a registered representative body, not a lobbyist and I have also checked it off with the Prime Minister’s Office and they approved it,” Macfarlane said.
“I’m not a lobbyist, I know what a lobbyist is, I have met more lobbyists than I’ve had hot dinners. I am a CEO of a state representative organisation.”
The list of former politicians and senior political staffers – from both sides – who have found lucrative new jobs with the fossil fuel lobby is long. The quantum of their donations to the major parties is huge – some $3.7 million over just the past three years. One hand washes the other.
But while Australia continues to encourage new mines, other countries have seen the writing on the wall. Denniss notes that China now has a moratorium on new mines. So does Indonesia, which vies with Australia as the world’s biggest exporter. In January United States president Barack Obama placed a moratorium on new mining on public land, which now produces about 40 per cent of American coal.
“The interesting thing about Obama’s moratorium announcement was that it didn’t mention climate change,” Denniss says. “It said the moratorium was because they were giving away their coal at peppercorn prices.”
A moratorium would be the smart thing to do not only environmentally, but economically, Denniss says, because falling demand and increasing supply can only push coal prices down, eventually resulting in a lot of stranded assets and a lot of debt.
But the final factor that needs to be considered in calculating the future of coal is the price of the alterative, renewable energy. And it continues to fall fast.
Last week in Abu Dhabi details were released of competing bids to install a huge new solar generating plant. This was noteworthy first because it showed that even oil-rich Gulf States such as the United Arab Emirates now realised the need to move away from fossil fuels.
More significant, though, was the bid price. There were six bidders, and all were unprecedentedly low. The lowest of the lot offered power at just 2.42 US cents per kilowatt hour.
“At that price there is no way any coal exporter can compete,” Buckley says. “At that price, or a price anywhere near it, the seaborne coal trade is dead.”
If things play out as the analysts expect, the industry doesn’t have much of a future. Just a long dependency on the life support of fixed prices, and on subsidies won by lobbyists feeding out of parliament, until the Chinese cartel decides to pull the plug.
This article was first published in the print edition of The Saturday Paper on Oct 1, 2016 as "Inside China’s coal price cartel".
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