June 15, 2017 / 6:26 AM / a month ago

COLUMN-Despite 2016 dip, it's too early to celebrate the demise of coal: Russell

6 Min Read

(The opinions expressed here are those of the author, a columnist for Reuters.)

* Graphic of annual global coal output vs China: tmsnrt.rs/2rynxKa

By Clyde Russell

LAUNCESTON, Australia, June 15 (Reuters) - It may be tempting for those opposed to burning coal to break out the champagne and toast the second consecutive annual decline in the use of the polluting fuel, but it's also likely a little early.

World coal consumption dropped by 1.7 percent in 2016, according to the BP Statistical Review of World Energy, which was published on June 13.

Consumption fell by 53 million tonnes of oil equivalent (mtoe), which equates to about 79.5 million tonnes of hard coal on an energy basis, the review said.

Global production of coal plunged 6.2 percent to 3,656 mtoe, or about 5.5 billion tonnes of hard coal, the review said, the largest annual drop on record.

That's the good news for efforts to curb the use of the most-polluting major global energy source.

The bad news is that 2017 may well see coal output and consumption increase from last year, and as usual with most things coal, it's all about China, which accounts for about half of global consumption.

China is also the world's largest producer and importer of the fuel and while the authorities in Beijing have had success in reducing coal's share of the country's energy mix, so far this year is on track to see an increase in demand.

This is largely because 2016 was somewhat exceptional in China from a coal perspective, with two factors combining to lower output and demand.

The first was a policy driven move to restrict production by limiting the working days of domestic mines, which was aimed at boosting prices to ensure the viability of the industry as well as curbing air pollution.

If anything the policy was too successful, resulting in a 9 percent drop in output in 2016 to 3.64 billion tonnes, the third consecutive annual decline.

But rapid price gains and worries over a shortage of domestic coal prompted Beijing to reverse course, allowing mines to boost output in order to ensure adequate stocks and reduce reliance on imports, which surged 25.2 percent last year.

China's coal production rose 12 percent in May to 297.8 million tonnes from the same month last year, according to official data released on Wednesday.

For the first five months of the year, coal output is up 4.3 percent to 1.4 billion tonnes, and a hot start to summer and low levels of inventories suggest that both domestic production and imports may rise in coming months.

Weather to Boost Coal Use

The weather was the other factor behind the decline in China's coal demand in 2016, with both a mild summer and winter curbing the need for electricity.

If this summer does prove to be warmer than usual, it's likely that this alone will be enough to boost coal demand for the year.

Imports are also still rising in China, with 111.7 million tonnes imported in the first five months of the year, up 29.6 percent from the same period in 2016.

Rising imports will support coal production in China's main suppliers, Australia, Indonesia, Mongolia and Russia.

If China's domestic coal output maintains the growth rate for the first five months of 2017 for the entire year, it implies production will rise by about 160 million tonnes from 2016.

This is slightly less than half of what global coal output fell by in 2016, according to the BP review.

It's also likely that coal output will gain in other countries, with India's state-owned producer targeting production of 660 million tonnes in the fiscal year from April 2017 to March 2018.

If achieved, this would be an increase of 106 million tonnes from the 2016-17 fiscal year, but it's extremely unlikely Coal India will get anywhere near its target, if history is a guide.

In 2016-17 the company fell 44 million tonnes short of its target, but still managed to produce some 25 million tonnes more than it did the prior year.

Nonetheless, it's likely that India will increase output in the current year, and even an increase of the magnitude achieved in 2016-17 will add significantly to global production.

Indonesia, the world's top exporter of coal, is expected to boost output by nearly 5 percent in 2017, or about 20 million tonnes, to 460 million tonnes, according to the country's coal mining association.

And if U.S. President Donald Trump has his way, coal output in the world's second-largest producer will rebound, although most analysts dismiss this as unrealistic.

What is more likely is that coal output in the United States may stabilise, with higher production of coking coal used to make steel offsetting any declines in coal for power generation.

Colombia, the world's fifth-largest coal exporter, plans to boost output by 4 million tonnes this year to around 95 million tonnes, a government official said on March 22.

Another factor to consider with coal is price, and it's likely that part of the decline in consumption in 2016 was related to the strong rally over the year.

The Asian benchmark weekly thermal coal price at Australia's Newcastle port more than doubled from the start of 2016 to the peak of $109.69 a tonne in November.

It has since slipped back to $80.79 a tonne for the week ended June 9, with this decline improving the competitiveness of coal against other generating fuels, such as natural gas.

Overall, with major coal producers planning to boost output this year, it's possible that 2017 will see an increase in production and consumption, or at least a sharp slowdown in the rate of decline.

Editing by Richard Pullin

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