CHINA’S FALLING COAL USE PUTS PRESSURE ON EUROPEAN POWER PRICES

EUROPE New data shows that Chinese coal consumption for energy has already peaked and that the target to cap CO2 emissions by 2030 might be reached far ahead of time. China’s energy transition is good news for the climate but might mean trouble for utilities as lower demand for coal puts pressure on European electricity markets.

When the world’s biggest coal importer steers away from its main source of energy, it is turnaround of global importance. If the trend holds, the price of coal will be dramatically lower, with increased pressure on prices in European electricity markets.

“Lower coal prices means lower electricity prices and thus lower revenue from energy sources like hydro and lignite, for example. It also means that Vattenfall’s gas plants are under constant pressure”, says Atis Lukins, analyst at Vattenfall Corporate Strategy.

THE CHINESE TRANSITION MEANS REDUCED COAL IMPORTS
Lukins believes that China’s dominating role in the global coal market is about to change.

“China will no longer be the big importer of coal that it used to be. Its economic growth is slowing down, there is an expansion in renewables and the country has huge potential to accelerate energy efficiency. Energy use per unit of industrial production is higher than in the West and the industry is shifting away from steel and cement to less energy-intense sectors like IT and technology. In addition to this, China has strengthened its infrastructure for its domestic coal supply. So they are now getting better at supplying the coal they do still need from domestic sources rather than through the high levels of imports previously witnessed”, says Lukins.

In 2013 China was the world's biggest importer of coal

CHINA’S EXPANSION LED TO HIGH COAL PRICES
From around the year, the global coal price was driven by China’s expansion. The country went from being a net exporter to a net importer and a rapid rise in prices followed.

“The Chinese economy grew by over 10 per cent each year between 2000 and 2011. A consequence of this brilliantly successful economic strategy was greatly increased living standards for the vast majority of Chinese people. It underpinned China’s emergence as a great economic power”, says Ross Garnaut, Professor at the University of Melbourne and a China expert and compiler of two emissions trading reviews for governments.

The economic expansion also meant that China became the world’s biggest coal burner. But since 2011 economic growth has slowed to around 7 per cent. At the same time, China’s coal consumption has levelled out.

“There has been a “dramatic decoupling” of coal from economic growth”, Garnaut says.

LOWER GLOBAL COAL PRICES AHEAD
“You need to be aware that predictions about future coal prices rest on a great deal of assumptions and expectations. But lots of things point to the high coal prices we have seen during the economic expansion in China not coming back”, says Lukins.

Market price of steam coal northwest Europe 2005-2015
   

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