Post-COVID coal: not dead, only resting

Global demand for coal has fallen by around 26 per cent since the global COVID-19 pandemic, triggering a new round of media reports breathlessly predicting the virus would trigger its fatal decline. Most recently the Guardian claims coal will “never recover” from the shock as developed economies were now cutting back on coal to power their electricity systems because it was more expensive than gas and renewables, bringing forward plant closures.

But then the “experts” interviewed by The Guardian were anti-coal campaigners. It does raise an important question for global emissions and the Australian economy: what does demand for coal look like in a post-COVID world?

In the pre-COVID-19 coal market, global demand for coal peaked in 2018 at around 5.6 billion tonnes, pushing thermal coal prices to around USD$120/tonne. According to the International Energy Agency the strong demand growth had been coming from increased investment in coal fired generation in developing economies (China, India and Asia), offsetting softening demand from developed economies.

Record high thermal coal prices triggered an expansion in output from non-Australian exporters like India, Indonesia and Russia, which, combined with slightly easing demand in 2019, brought prices back down to around USD$70/tonne at the start of 2020.

Global coal price 2016-20 Source: Trading Economics

The effect of COVID-19 lockdowns has been to reduce global energy demand. Oil demand fell by around 30 per cent, canyoning some oil prices briefly into negative territory as lockdowns bit sharply into demand from aviation and passenger cars.

Electricity demand has fallen too, but the declines have been smaller. While Italy at the peak of its lockdowns reported 20 per cent cuts in electricity demand, electricity demand in Australia has fallen by only around 3 per cent.

Coal prices dropped down to around USD$50/tonne in April, but have started to recover as global demand slowly recovers. Predicting future energy demand growth in a post-COVID world is fraught because of the range of exogenous factors that could impact supply and demand.

It’s increasingly clear global greenhouse emissions will be materially lower in 2020 as a result of lower consumption of fossil fuels. In the National Electricity Market (NEM) renewables have displaced conventional generation as they have a zero marginal cost to operate, accelerating emissions reductions.

Demand for coal will fall as electricity demand falls, and recover as it recovers. Coal fired generators are assets with an operating life typically of around 50 years. Their continued operation will depend on demand for electricity, coal prices and domestic emissions reductions policies. A 12 month exogenous demand shock is unlikely to imperil any asset that was not already imperilled.

The problem with sustained low energy prices is that they will discourage new investment of all types, including renewables and their supporting technologies. Sustained global weakness in energy demand is most likely to slow new investment and result in the “sweating” of existing generation assets (of all types) until investment signals are stronger.

In developing economies which remain the most durable market for coal into the future, the weakness in these investment signals will only be amplified in a post-COVID world of high debt and global recession.

The ultimate measure of the end of coal is a sustained decade-long decline in the global price, as demand collapses and producers exit the market at scale. The COVID-19 epidemic does not appear to have changed the macro conditions that determine the future of coal.