Australian Coal and Natural Gas: The Road to Nowhere

China’s economic slowdown is posing serious risks for the future of Australia’s energy sector. Whether it’s coal or natural gas, local producers face a particularly bleak outlook.

China’s sluggish growth is the leading cause behind these concerns. Demand for coal in particular has slumped as growth weakens. Meanwhile, new measures targeting air pollution are crimping demand too.

As a result of all this, Chinese coal imports are down 30% in the year to September. Coal use plunged 5.7% over this period too. And it’s left Chinese coal-fired power plants seriously underused. Utilisation rates were a mere 49.5% in the year to September.

Unfortunately, China’s coal demand hasn’t bottomed out yet. And it makes any demand or price recovery unlikely for the foreseeable future. The US$80 price point, last seen in 2010, may be as good as it gets.

One way or another, the message for Aussie coal producers is clear. Where once we could rely on China, we can’t anymore.  And replacing it will prove easier said than done.

Indian coal and self-sufficiency

Aussie coal producers aren’t stupid however. They’ve seen this coming for some time. Which is why the industry pinned its hopes on India taking the baton from China. Yet analysts now predict India will fall well short of what’s required. Bloomberg’s New Energy Finance rejects the belief that India can make up for slowing Chinese demand.

It’s not that India won’t need coal in the future. It’s just that it won’t need Aussie coal. Or any other foreign coal for that matter. India is on course to become coal self-sufficient by 2023. Because of this, Bloomberg expects Indian coal imports to peak as early as next year. It notes:

The growth in India’s coal consumption is not going to be met by [imports]. The idea that as China’s coal demand slows India opens up as an export market looks be pretty superficial analysis’.

India’s electricity needs will still grow three fold by 2050. And coal will play a leading role in meeting this demand. But it will increasingly bypass Australian coal. As India starts producing more of its own, it will leave Australian domestic exports facing difficult decisions. With weak demand in China, and little to no demand from India, options will be thin.

You can see why an energy independent India problematic for Aussie exporters. India is really the only viable alternative to China. No other country comes close to matching India’s potential. In terms of market size, the sky’s the limit. Its energy demands are growing year on year, on a scale unmatched anywhere else. It’s also on our doorstep, making exports cheaper and allowing for higher profit margins.

As a viable option, there’s no market with as much upside as India. Only problem is that it will be coal independent in as little as eight years.

As Bloomberg notes, coal will be as important in 2040 as it is today in Asia. It’s just that fast growing markets won’t have need for foreign coal. Not nearly in the way that China has in the past.

On top of this, coal demand will slow across the developed world too. Japan and South Korea already import vast quantities of Aussie coal. Together they account for over 50% of total exports. But their demand is expected to slump too as global growth slows.

Australian natural gas exports grow to slow

Unfortunately, the news doesn’t get much better for LNG. LNG, short for liquefied natural gas, allows for easy storage and transport of gas. At present, LNG is only second to coal as the premier source of Asian energy. Yet according to Bloomberg, LNG will play a smaller role in Asia by 2050. Bloomberg reports:

It’s a pretty bad story for Australian LNG hopes. The energy mix is going to be coal plus renewables for Asia’.

In its place, Bloomberg is forecasting a surge in renewable energy. So much so that it expects renewables to overtake LNG in the coming decades. It reckons 67% of new electricity will come from solar and wind energy by mid-century.

Despite this, LNG demand will continue growing to 2040. By as much as 31% according to estimates. That might sound impressive at first. But it’s well short of recent forecasts predicting a doubling of LNG demand.

Coal will feel the pressure from renewable energy as well. Bloomberg forecasts renewables outstripping coal capacity across Asia. In India’s case, it expects solar and wind power doubling coal capacity by 2040. As for China, renewables and nuclear capacity will triple its coal capacity by then.

There’s no hiding from how poorly all this bodes for Australia. Coal and natural gas are our two biggest exports after iron ore. You can easily see iron ore bouncing back in the future. There are plenty of candidates who could take up China’s slowing demand for steel. But the same can’t be said of coal or LNG. Not when markets with the most upside are becoming self-sufficient.

For Australia, the equation is simple. Lower demand will lead to lower revenues. That stands to shave a decent chunk off Australia’s $50 billion plus coal industry. And while the domestic LNG industry is smaller by comparison, it still accounts for $17 billion in revenues. That’s no small change. Combined losses are likely to be substantial. It could wipe at much as $10 billion from national coffers.

Anyone pinning their hopes of India becoming China Mk II should think again.

Mat Spasic,

Contributor, Markets and Money

PS: Mining stocks have fallen sharply as a result of China’s slowdown. As Bloomberg outlines, they could fall much further in the coming years…

Markets and Money’s Vern Gowdie believes we’re going to see a catastrophic crash on the ASX. Vern is the award-winning Founder of the Gowdie Family Wealth and The Gowdie Letter advisory service. He’s ranked as one of Australia’s Top 50 financial planners. Not only does Vern predict a major crash, but he’s convinced the ASX could lose as much as 90% of its market cap. The ASX has already shed 11% of its value since April.

Vern wants to help you avoid this coming wealth destruction. Which is why he’s written ‘Five Fatal Stocks You Must Sell Now’.

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