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Appalling fate of non-coking coal trade

While imports to the EU will continue to decline, momentum in Asia’s imports will remain intact over the next five-eight years, thereby supporting dry bulk shipping demand. However, increasing consensus on limiting climate change is expected to decelerate coal imports to Asia post-2030, leading to a drop in non-coking coal trade and consequently dampening employment opportunities for dry bulk vessels.

Voices against pollution-emitting technology, including coal-based power plants, are getting louder by the day, influencing decisions of both government authorities and private players. Since the power sector is the prime consumer of non-coking coal, growing aggression against coal-fired power plants will directly impact non-coking coal trade. As a result, dry bulk vessel employment will also be affected as almost 25% of the dry bulk trade is currently confined to non-coking coal.

EU coal imports to vanish

Europe has already started phasing out coal-fired power plants as most major European coal consumers have pledged to stop using coal for electricity in the future. Some of the EU countries such as France, Portugal, Italy and the UK, which together account for 12% of EU’s non-coking coal imports, are set to cease the use of coal for power generation by 2025. Meanwhile, some other countries such as Germany and Poland which import 36% of EU’s seaborne non-coking coal will take a bit longer.

Amid reducing coal-fired power generation in Europe, seaborne non-coking coal imports are also declining. In 2019, the EU imported 73 million tonnes of non-coking coal which is a whopping decline of 48 million tonnes from 2015. Over the next 10 years, the region’s imports of the commodity will further decline as the European countries will accelerate the suspension of coal-based power plants.

Despite plummeting EU coal imports, global non-coking coal trade has flourished at a CAGR of 3.3% because of expanding coal-based power generation in the Far East, India and Southeast Asia. Over the next five-eight years, rising imports to non-EU countries will continue to support the trade of the commodity.

Even though most major and minor coal importers in Asia have not created any detailed plan for phasing out coal-based power plants (similar to what European countries have done), how long will they continue to depend on coal needs to be seen.

In other words, will non-coking coal imports in non-EU countries continue to outpace the decline in imports in the EU even in the long term (beyond 2040)? We analyse below the developments in the power sectors of top coal importers in Asia.

Major Asian importers are gradually adopting a stance similar to the EU against coal

As per South Korea’s eighth long-term plan for electricity, the country will not add any coal-fired power capacity after 2025. Meanwhile, the country is targeting to reduce the share of coal in power generation from 41% in 2019 to 36% by 2030. Since annual electricity consumption is likely to rise marginally by 0.8-2.0%, the declining share of coal will reduce coal plant utilisation and thereby coal consumption. It is worth noting that this plan is more than three years old, and recently the South Korean president has publicly vowed to make the country carbon neutral by 2050 which means that the government will eventually introduce a carbon tax, cease finance for coal plants (not just domestically but overseas as well) and accelerate the expansion of renewable infrastructure to ensure continuous electricity supply in the country. However, infrastructure development takes time; therefore, coal will remain a dominant source of power in the country until 2030. Currently, roughly 7GW of coal-fired power capacity is under construction, but if the government is determined then the recent announcement will lead to early phase-out of ageing coal power plants, rapid decline in coal plant utilisation and thereby a swift fall in the country’s coal imports after 2030.

Japan has also vowed to achieve carbon neutrality by 2050. Hence, the fate of coal in Japan will be similar to that in South Korea beyond 2030 especially when the declining population in the country will lead to almost no growth and possibly a decline in electricity demand.

Currently, China’s stance towards coal power is a bit unclear. Although the country has announced that its CO2 emissions will peak before 2030 while the target of carbon neutrality will be attained by 2060, coal-fired power capacity is rising. According to the report by Global Energy Monitor, more than 98GW of coal-fired power capacity is under construction in China following the high number of approvals for coal projects over the past three-four years. Currently, the country is framing the new five-year plan and its finalisation will decide the future course of action for coal energy in China. Meanwhile, a recent government announcement for reducing carbon footprint indicates that in the upcoming plan the government might prohibit further approval of coal-fired power capacity and choose to convert some of the pipeline projects to LNG.

Unlike South Korea and Japan, India’s coal-fired power capacity is expected to expand over the next 10 years due to its rising electricity consumption. As per the projections in National Electricity Policy, annual electricity generation in India will continue to grow by 5.8% until 2027, but the pace of coal-fired power capacity addition will be gradual. During 2014-20, roughly 10GW of coal-fired power capacity was added annually. However, based on the assessment by India’s Central Electricity Authority, coal power capacity will rise by a little more than 6GW per annum until 2030, implying a fall of 38% in annual capacity addition over the past six years. Post-2030, growth in the capacity of the coal-based power plants will slow down further as most of the rise in electricity generation will be primarily met by renewables. Over time, improving efficiency of solar and wind panels as well as battery storage capacity will lift the reliability of renewables, further assisting the country in reducing its thrust on fossil-fuel-based power. This is reflected in the recent decision by India’s largest thermal power plant operator – NTPC. Although the company currently owns one-fourth of India’s coal-fired power capacity, it has decided not to build any coal power plant other than the projects that are already under construction or in the pre-construction stages. Over the next few years, other power companies can take similar decisions, hinting at marginal or negligible rise in India’s coal power plants beyond 2030.

The situation seems similar among minor coal importers in Southeast Asia. The government of Philippines has decided not to approve any new proposal of coal-based power plants to encourage power utilities to invest in renewables. By end-2019, the country had 10GW of coal-fired power capacity while 4GW of coal-based power capacity is committed and is under construction/pre-construction stages. Around 9.8GW of coal-based power capacity is already in the planning stage and seeking regulatory approvals, which if approved should commence operations by 2030. Therefore, in the long term, coal-fired power capacity in the Philippines will not expand further.

Reluctance of investors to finance coal-related projects to discourage coal power expansion

The government of Thailand plans to keep coal-based power capacity almost stagnant until 2030. As per the country’s power development plan, Thailand will be adding 2GW of coal-fired power capacity during 2033-37 as its old coal fleet will retire. However, similar additions seem unlikely in the long term as the falling construction cost in tandem with rising reliability of renewables will render such additions uneconomical.

Currently, the government of Vietnam is quite enthusiastic about lifting power production capacity as demand for power in the country is surging. As per the country’s power development plan, about 30GW of coal-fired power capacity will be added over the next 10 years. Nonetheless, financing these plants will be a major hurdle for the government as the recent decision by Japan and South Korea to go for carbon neutrality will prompt Japanese and South Korean companies to avoid participating in the construction and operations of overseas coal-based plants.

Samsung C&T plans to increase exposure to renewable energy while ceasing participation in coal-related projects. After the completion of two coal-fired power plants, one in South Korea and another in Vietnam, the company will not opt for any other coal-based project. On a similar note, after facing strong criticism for participating in the construction of coal power plant in Vietnam, Korea Electric Power Corporation (KEPCO) is mulling over converting the coal power project in the Philippines to LNG.

Other emerging coal importing countries are also facing similar hurdles. For instance, due to lack of investment, the government of Bangladesh is either compelled to shelve coal-based power plants in the pipeline or consider converting some of the projects to LNG.

In a nutshell, expansion of coal-power generation capacity will slow down after 2025 even in developing countries because banks and institutions are unwilling to finance coal-based power plants amid increasing pressure from stakeholders for reducing carbon footprint. Since the cost of renewable energy is declining, the stance of market players is likely to remain against coal even in the long term. Therefore, the possibility of a complete halt on the construction of coal-based power plants post-2030 is quite high. It will lead to decelerating non-coking coal trade and will be a big blow to dry bulk vessels, especially Panamaxes, given the current huge share of non-coking coal in total dry bulk trade. Moreover, as coal power plants in these countries will retire over the next 20-25 years while coal-based plants are already closing in Europe, trade of non-coking coal is likely to be negligible by 2050-55. Over the next five years, as the stance of stakeholders becomes clearer, shipowners and charters need to keep an eye on government strategies. In the long term, it will be in the interest of vessel owners to gradually move their vessels away from non-coking coal trade and find employment in other dry bulk commodities such as bauxite, grain, and minor ores and minerals.
Source: Drewry

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