Is a Coal Bubble Bursting in China?

Growing evidence that coal export plans are risky.
This post is part of the research project: Northwest Coal Exports

In spite of all the US coal industry spin about a global coal “super-cycle,” it looks like China’s prodigious appetite for coal is fading.

In case you missed it, there was a must-read story in the Financial Times this summer, Fading fortunes: China’s demand for big coal wanes. As the FT piece shows, even coal traders now admit that China’s coal boom isn’t living up to the hype.

As one manager put it:

“There is a lot of coal floating out at sea…We stopped importing at the end of May,” he added, citing weak coal demand because of a slowing economy…

The article goes on to describe a China that—like the United States in some respects—is moving to reduce its energy intensity, and boost natural gas and renewable energy production. Chinese policymakers are even eying carbon pricing. All of that spells bad news for would-be coal exporters in the Northwest.

In fact, earlier this week, Reuters reported on further grim news for China’s domestic coal industry:

China’s coal prices, already near a two-year low, are likely to fall further as industrial demand growth slows and imports add to pressure on domestic stocks, industry officials said on Tuesday.

Interestingly, a slow-down in China’s industrial production may wind up having an indirect effect on US exports. As steel making falls off in that country, Chinese coal producers are apparently declining to prepare the coal to make it suitable for metallurgical purposes, opting instead to sell it into the “thermal” (electricity-producing) market. That could well have the effect of crowding the very market that’s so sought after by US coal exporters who have plans for Northwest ports.

All of this should concern Northwest decision-makers. Twice before West Coast ports have pinned their hopes on fables of steady coal demand in Asian markets. In both cases, the result was pollution, broken promises, and bad debt.

Update 9/7/12: The Australian newspaper, The Age, describes mounting difficulties for Indonesia’s coal exporters owing to falling demand in China. Indonesia supplies about half of China’s coal imports, but prices and shipments are down sharply:

Chen Ze, deputy director in the coal industry department in Inner Mongolia, China’s biggest coal region, said he expected imports from the United States, Australia, Indonesia, Colombia and South Africa to compound the oversupply in China.

“Because demand in Europe is poor, so everyone will try to move their coal to China,” he said at the Beijing conference.

The upshot, I think, is that Northwest coal exports are a dicey proposition at best. US coal will be trying to enter a market with falling demand and numerous alternative suppliers.

Thanks to Stevan Harrell.

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