Chinese demand for coal has risen to more than half of global consumption, and its continued rise has been nearly unquestioned by analysts. The International Energy Agency (IEA) has even predicted that coal will supplant oil to become the leading global fuel almost entirely on the strength of Chinese power generation. But Citi analyst Anthony Yuen thinks this scenario is overblown, and that actual Chinese coal consumption should stabilize or even decrease.
China is in the process of trying to cool GDP growth
“The rate of power demand growth in China is slowing, and structural factors indicate this trend may continue,” writes Yuen. “Energy intensity of economic growth typically occur as countries undertake structural shifts from industrial-led growth to more diversified models.” As even casual observers know, China is in the process of trying to cool GDP growth and bring an era of loose credit to a close without incident. Lower growth, and growth that is less dependent on energy, make the long-term prospects for Chinese coal production much less certain.
Yuen is also optimistic about alternative energy, noting that it “continues to surprise to the upside.” Chinese leadership has shown that it wants to prioritize clean energy when possible with a policy to add roughly 500 GW of non-coal energy supply by 2020, using a combination of nuclear, wind, solar and hydro energy. As renewables become cheaper and more efficient at converting energy, it’s clear that the Chinese government will continue to transition to their use.
Yuen thinks we may be seeing peak coal in China
Put these two things together and it becomes clear why Yuen thinks we may be seeing peak coal in China.
“If non-coal generation growth outstrips power demand growth, which is already slowing, coal use is set to plateau or decline,” he says. “We believe [this possibility] needs to be priced-in into any global energy forecast at a much higher probability than markets currently anticipate.”
Aside from the potential impact on long-dated coal prices and the reduction of carbon emissions, peak coal could impact the competitiveness of coal exporting countries, including the world’s largest coal exporter the United States. It will also have a serious impact on China’s neighbor Mongolia, a relatively poor country with the highest percentage of GDP coming from coal exports.